The sole proprietors and shareholders who have unlimited liability should file for bankruptcy to protect their personal assets from being seized and liquidated by creditors to repay the debts of the business. Chapter 7 of the bankruptcy code is the most common in that it liquidates the business and discharges debts and obligations that the company cannot meet. Therefore, you start over the business without commitments or burdens from the time the business shut down.
You are protected from bad debts for a while until the company is stable enough to repay them. Chapter 11 of the bankruptcy law temporarily suspends specific obligations of the company until it reorganizes itself and gets into a position to meet those obligations. This chapter requires you to present before the courts a reorganization plan that is realistic and achievable. The plan includes a proposal of the percentage you will pay the creditors if they agree to it, or the creditors can also agree to help the company to stabilize in exchange for more pay when the business succeeds in the future. The judge makes the final ruling.
Contract renegotiation is another option when you file for bankruptcy under the chapter 11 reorganization plan. You are allowed to renegotiate contracts or a reduction of debts on more favorable terms with key stakeholders like labor unions, suppliers, and more. The members of the labor union have to vote against or support the recommendations that you provide to them before they agree or disagree with you. The management of the labor union will then present their recommendations to your company after analyzing your reorganization plan and financial position.
Filing for bankruptcy gives you enough grace period to salvage whatever has remained in the company and reorganize yourselves. Suspension of debts relieves the excessive pressure that the management has for them to concentrate fully on how they are going to revive the business. The administration cannot come up with an effective and efficient reorganization plan when they have the pressure from the creditors. They need ample time to consult experts and put their ideas together for them to find long term solutions.
You get a competitive advantage for filing for bankruptcy when your bad debts are temporarily suspended. Renegotiating better terms of contracts with labor unions, suppliers, and more key stakeholders also play a vital role in enabling your company to stay on the same level if not ahead of the competitors.