The term “bankrupt” is dreaded by many, and to be sure, bankruptcy is not something to be desired. Then again, bankruptcy does not have to mean “broke and hopeless.” Rather, a bankrupt individual or company may find debt relief when it hires bankruptcy lawyers from a nearby bankruptcy law firm to defend its interests in a court of law. Bankruptcy court is designed to allow all relevant parties to work together to some degree to resolve the outstanding debt, and the debtor may soon find debt relief during this process. Doing so many involve some downsizing or liquidation, but the quest to find debt relief can be realized. Why do some companies today go bankrupt, and what can they do to find debt relief?
Why Bankruptcy Happens
A bankrupt company is one that officially recognizes that it cannot pay off its debts with its current financial affairs, and will thus declare bankruptcy and the manager may hire a bankruptcy attorney to help during court. A company may to bankrupt if it makes ill-advised loans, for example, or if that company’s client or consumer base simply dries up. Many new companies fail because they take on debt and cannot secure enough customers or clients to start making a profit.
In other cases, however, the bankrupt company was the victim of a crime. Embezzling is done when an employee covertly pockets money from the company, and securities fraud or stock broker fraud is when an employee falsifies financial reports and stock value. This may cause investors and companies to make bad investments that they would normally avoid, and this can drive some companies bankrupt. Investors may pull out once they realize that they’ve been fooled. And in yet other cases, a cyber criminal will break into a company’s servers or Cloud data storage and steal information such as bank accounts, passwords, client and consumer profile data, and more. All of this may result in serious financial losses that hurt larger companies and may drive smaller ones completely bankrupt. If a company has declared itself bankrupt like this, it may turn to a local bankruptcy court and find debt relief there.
Bankruptcy and Court
When a debtor company goes to court, it is trying to find debt relief, and the judge and creditors will be other relevant parties also seeking a resolution to the debt. Most often, smaller companies file for chapter 11 debt in particular. So far, if the debtor company has been acting honestly and fairly, it may be considered DIP, or “debtor in possession.” This means that the debtor company will retain ownership of itself and may stay open to continue business as usual, but with some conditions involved. For one, that debtor company may not take out new loans without the court’s or creditor’s permission, nor may it buy or sell property outside of what it normally buys or sells for business purposes. Nor may the debtor hire or retain lawyers without permission by the court. Violating these terms, or committing some other illegal or dishonest act, may result in the debtor company losing its DIP status.
In the meantime, the debtor company will be asked to create what is called a reorganization plan, and present that plan to the parties involved. This is what it sounds like: a plan that may restructure the debtor and possibly downsize or partially liquidate it in order to make debt repayment possible. Bankruptcy lawyers may help the debtor company devise such a plan and ensure that all proceedings in the court case are fair. The debtor may also ask for a time extension and possibly receive it. After some months, the debtor company will present its reorganization plan to the court, and should this plan be accepted, it will be set into motion. In rare cases, the plan will be rejected and the creditors will create and use their own plan. Either way, the debtor will be partially or totally liquidated to pay off whatever portion of the debt is possible to repay in this manner. In some cases, the debtor may be totally liquidated and only a fraction of the debt can be repaid, so the creditors may have to be content to accept a partial debt repayment in this situation.