Bankruptcy can impact businesses in a variety of ways, both personally when the business files for bankruptcy protection and vicariously when clients, customers, or vendors file for bankruptcy.  Individuals or businesses who have liabilities that exceed assets and are unable to meet financial obligations as they become due often have to make the tough but necessary decision to file for bankruptcy.

For businesses that are the creditors of a consumer or other business filing for bankruptcy, it is important to consult with a bankruptcy attorney to find out just what the company’s rights and obligations are.  Once someone files for bankruptcy (the business or individual is then called the “debtor”), that bankruptcy petition affects all creditors of the debtor.  There are many different categories of creditors, including:

* Secured creditors (typically those holding a lien against a debtor’s property)

* Unsecured creditors (typically vendors, credit card companies, and anyone else holding the debtor’s unsecured debt)

* Judgment creditors (typically those creditors who have sued and obtained a judgment against the debtor before the bankruptcy was filed)

* Creditors with super priority claims (these creditors have priority over other creditors due to special rules or proceedings within the bankruptcy)

* Creditors with administrative claims (typically these creditors are accountants or lawyers with claims that are given priority because they have assisted in the bankruptcy process in some way)

* Post-petition creditors (these creditors have extended credit to the debtor after the bankruptcy was filed. Bankruptcy generally covers only debts that were outstanding at the time the petition was filed.

Bankruptcy rules can be complicated.  Debtors who do not follow all bankruptcy requirements or who make misrepresentations to the court can be denied a discharge or face other penalties.  Creditors are not immune to following bankruptcy rules, either.  Creditors can face punitive sanctions if, for example, they collude with the debtor to hide assets.  Creditors can also get in trouble with the bankruptcy court if they violate the automatic stay and keep up their recover attempts against the debtor.

Businesses that are in dire financial straits may be impacted by bankruptcy more personally by filing for bankruptcy protection themselves.  In the business world, there isn’t quite the social stigma to filing for bankruptcy that individuals sometimes perceive there being.   Bankruptcy can actually be an effective tool–if used correctly–to save a business from going completely bust.  In a Chapter 11 proceeding, business debt can often be restructured or consolidated, allowing the business to continue operations rather than shutting down entirely.

No matter how a business is being impacted by bankruptcy, however, it’s always a good idea to have an experienced bankruptcy attorney on the company’s side.