When Should a Small Company File for Bankruptcy?

Bankruptcy proceedings occur in the courtroom.

A small company should file for bankruptcy protection when liabilities are equal to or greater than assets and management is unable to repay creditors. Not all bankrupt companies go under, and some emerge stronger than they were prior to the filing.

Types

Companies primarily file for one of two types of bankruptcy: Chapter 11 or Chapter Seven. A company that plans to restructure its business and reemerge as a profitable entity files Chapter 11. A company that plans to close its doors and liquidate all assets files for Chapter Seven.

Considerations

Companies can seek "debtor-in-possession financing" from a bank to help repay creditors. This loan may be submitted with a Chapter 11 filing and must be approved by the bankruptcy judge.

Procedure

A company that plans to file for bankruptcy should retain a bankruptcy lawyer. The filing must be made in a city where the company has business operations. An example of a bankruptcy courthouse is the U.S. Bankruptcy Court for the District of Delaware.

Purpose

A company files for bankruptcy in order to protect the business from creditors in the event it is not able to make payments. In a Chapter 11 filing, a company's management continues the daily operations while simultaneously attempting to reorganize the business.

Landmark Bankruptcies

Investment bank Lehman Brothers filed for a $691 billion bankruptcy on September 15, 2008, according to Fortune. The company liquidated most of its assets, including its capital markets business, which was sold to Barclays Capital.

References

• Lehman Brothers' bankruptcy
• Bankruptcy Guidelines