For small-business owners, debt often provides the capital needed to create a company or finance expansion. However, sometimes the business loses its primary customer, has a poor retail location or fails to generate the revenue it needs. These and similar issues can make sizable debt a problem. In such situations, bankruptcy may be a company's best option. If a company files for reorganization under Chapter 11, it often can keep its accounts receivable.
Through bankruptcy, a formal, judicial proceeding, companies that cannot meet their financial obligations can either dissolve or reorganize and start anew. Federal laws provide bankruptcy protection, govern the right to file and have jurisdiction over all bankruptcy cases. State laws determine what company assets are protected in bankruptcy. A bankruptcy filing immediately halts a company's creditors from debt collection efforts. Collection efforts resume when the bankruptcy court allows them.
Advertisement Article continues below this adA business that needs to save its accounts receivable is a company that intends to continue operating when it emerges from bankruptcy. Therefore that company must file for bankruptcy under Chapter 11, which allows the company to reorganize its debts and finances over a specified period. A company repays as much debt as possible under the reorganization plan filed and accepted by the bankruptcy court. When the company resumes normal business operations, all of its bankruptcy debts are considered fully discharged.
Chapter 7 bankruptcy completely liquidates all of a company's property needed to pay off its debts. In general, nothing or almost nothing remains for owners, and the business ceases to exist. One problem that leads companies to file Chapter 7 is the inability to collect on receivables. If the bankruptcy trustee excludes the accounts receivable from the bankruptcy estate because he deems them uncollectible, the business is now defunct but the business owners can keep any money they collect from receivables 180 days after the Chapter 7 bankruptcy discharges.
Advertisement Article continues below this adAn accounts receivable results from businesses selling goods or services on trade credit -- for example, due in 15 or 30 days. A company creates an accounts receivable when it generates an invoice and sends that invoice to its customer. A company must fully disclose all its accounts receivable and its likelihood of collectability in the disclosure statement and reorganization plan it files with the bankruptcy court.
The goal of a Chapter 11 bankruptcy is for the business to continue operating while it addresses and resolves the financial and operational issues that led to its bankruptcy filing. Therefore, most bankruptcy courts allow a company to keep all of its accounts receivable as long as the company justifies this in its reorganization plan and fully discloses. The court allows the company's creditors to vote on acceptance of the plan, so a company's plan must also convince creditors, not just the court.