What is Bankruptcy?

What is Bankruptcy?

Bankruptcy Definition 

Bankruptcy is a legal process where an individual or business that cannot repay the debt to a creditor seeks relief from some or all of their debts. In most jurisdictions, the debtor initiates a bankruptcy case, which is imposed by a court order.

Understanding Bankruptcy in B2B Finance

Bankruptcy in B2B finance involves situations where one business that owes money to another business cannot meet its debt obligations and seeks legal protection through bankruptcy proceedings. This can significantly affect the creditor businesses, especially if they are reliant on the payments for their cash flow and operational sustainability. Here’s a general overview of the bankruptcy basics and how it works:

Filing Bankruptcy

A business (the debtor) files for bankruptcy case in court. The type of bankruptcy filed (e.g., Chapter 11 in the U.S. for reorganization) depends on whether the business seeks to continue its operations while reorganizing its debts or to liquidate its assets to pay off creditors.

Automatic Stay

When the debtor business files for bankruptcy, it invokes an automatic stay. This halts all collection efforts, lawsuits, and any action taken by a creditor attempting to collect debts from the debtor's business. This stay protects the debtor from additional pressure and to preserve the remaining assets for equitable distribution.

Assessment of Financial Situation

There’s a detailed review of the debtor’s financial situation, which includes inventorying an asset, examining debts, and assessing the overall financial health of the company. In cases of reorganization (such as Chapter 11 bankruptcy in the U.S.), the debtor proposes a plan to restructure its debts.

Creditor’s Involvement

Sometimes, the creditors get involved and asked to vote for a proposed reorganization plan. In some jurisdictions, creditors form a committee to negotiate to represent their interests and negotiate the terms of the reorganization. The priority of creditors’ claims—secured debt vs. unsecured debt—plays a significant role in debts settlement.

Repayment and Reorganization

For bankruptcy filings that involve reorganization, the debtor business implements the court-approved plan, which may include renegotiating terms with creditors, selling off parts of the business to raise funds, and restructuring operations. The goal is to emerge as a financially viable entity that can continue business operations while paying off its debts.


If reorganization is not feasible, the business liquidates its assets to pay off creditors to the extent possible. First, the business pays the secured debt creditors, then it pays the unsecured debt creditors, and if any funds are left, it distributes them according to the priority outlined by law.

Impact on Creditor Businesses

  • Cash Flow Challenges: A Creditor’s business, too, can face financial strain because of unpaid debts.
  • Debt Recovery: The amount recovered from a bankrupt debtor can be significantly less than the owed amount, affecting the creditor’s financial health.
  • Risk Management: Businesses often need to assess the creditworthiness of their partners and may need to adjust their credit policies for risk management.

In B2B finance, managing the risk of bankruptcy involves thorough credit checks, maintaining diversified customer bases, and sometimes securing credit insurance to protect against the risk of non-payment.

What is the US Bankruptcy Code?

The U.S. Bankruptcy Code is the federal law that governs the bankruptcy process in the United States. It is part of the United States Code (U.S.C.), which is a compilation of all the laws of the United States. The Bankruptcy Code is located in Title 11 of the United States Code. It provides a legal framework for bankruptcy proceedings, offering individuals, couples, and businesses various ways to address their debt issues under federal court protection.

The Bankruptcy Code structure features various chapters, each outlining a specific type of bankruptcy relief available to a debtor. The most commonly used chapters include:

  • Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, it allows for the discharge of certain debts after the liquidation of the debtor’s asset to pay the creditor.
  • Chapter 11 Bankruptcy: This chapter allows for reorganization under a court-approved plan to keep the business operational while paying creditors.
  • Chapter 13 Bankruptcy: This is a reorganization bankruptcy for individuals with regular income, enabling them to develop a plan to repay all or part of their debts.
  • Chapter 12 Bankruptcy: Similar to Chapter 13, but specifically designed for family farmers and fishermen, offering them a reorganization plan to pay off debts.
  • Chapter 15 Bankruptcy: Provides the mechanism for dealing with cross-border bankruptcies, facilitating cooperation between U.S. courts and foreign courts.

The Bankruptcy Code aims to provide a fair method for resolving debt problems, ensuring that creditors receive as much payment as possible while allowing debtors to keep enough property to get a fresh start. It balances the interests of creditors and debtors, providing a system for orderly debt relief and asset liquidation or reorganization.

The Code also establishes the role of the bankruptcy trustee, who administers the bankruptcy case and outlines the duties and rights of a debtor and a creditor. It includes provisions on filing for bankruptcy, the automatic stay that stops most collection actions, the discharge of debts, and the treatment of property and contracts in bankruptcy.

The Bankruptcy Code has undergone several amendments over the years to address emerging issues and improve the bankruptcy process, including significant changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

How to file for bankruptcy?

Bankruptcy filing is a standardized process, which can vary depending on the jurisdiction and the type of bankruptcy. Here’s a broad overview of the steps involved in filing for bankruptcy, especially in the United States:

Determine Eligibility

Type of Bankruptcy: First, determine which type of bankruptcy is appropriate for your situation (e.g., Chapter 7, Chapter 11, Chapter 13 for individuals, and Chapter 11 for businesses).

Means Test

For individual filings, such as Chapter 7, you may need to pass a means test to determine eligibility based on your income, expenses, and debt.

Credit Counseling

Before filing, individuals must complete a credit counseling session with an approved agency within 180 days before the date of filing. This requirement ensures that the filers understand all of their options.

Submit Bankruptcy Petition

Fill out the required bankruptcy forms, detailing your financial situation, including assets, debts, income, and expenses.

Filing Fee

Pay the filing fee. If you cannot afford the fee, you may request a waiver or installment payments.

Automatic Stay

Filing the bankruptcy petition automatically invokes an automatic stay, which temporarily stops most collection actions against you by creditors, collection agencies, or government entities.

Trustee Appointment 

The court appoints a bankruptcy trustee to oversee your case. The trustee’s role varies with the type of bankruptcy filed.

Meeting of Creditors (341 Meeting)

Attend a meeting of creditors where the trustee and creditors can ask questions about your financial status and the information provided in your bankruptcy forms.

Complete Financial Management Course

After filing, complete a debtor education course before any debts can be discharged.

Debt Discharge or Repayment Plan

According to Chapter 7, most of your remaining debts will be discharged after the trustee liquidates eligible assets to repay creditors. As per Chapter 13, you must adhere to a court-approved repayment plan, typically lasting 3-5 years, after which the remaining eligible debts are discharged.

Final Steps

The specific ending steps depend on the bankruptcy chapter filed. For example, in Chapter 13 bankruptcy, you will need to prove that you are current on alimony and child support obligations before debt discharge.

It’s strongly recommended to consult and get a bankruptcy attorney general opinion to navigate the complexities of bankruptcy laws and ensure all procedures are correctly followed. An attorney can provide valuable advice tailored to your specific financial situation.

Guidelines for Bankruptcy Management 

Managing bankruptcy, especially in the context of a business or personal finance, involves several crucial steps and considerations to navigate the process effectively and mitigate its impacts. Here are some general guidelines:

Seek Professional Advice

Consult with a bankruptcy attorney or a financial advisor to understand your options. Bankruptcy laws can be complex, and professional guidance is invaluable in making informed decisions.

Evaluate All Options

Consider alternatives to bankruptcy, such as debt consolidation, negotiation with creditors, or adjusting your budget to manage debts more effectively.

Understand the Impacts

Be aware of the long-term impacts of bankruptcy, including the effect on your credit score, credit report, and future borrowing capabilities.

Choose the Right Type of Bankruptcy

Understand the differences between Chapter 7, Chapter 11, Chapter 13, and other types of bankruptcy to determine which best fits your situation.

Gather Financial Documents

Compile detailed information about your debts, assets, income, and expenses. Accurate and comprehensive documentation is crucial for the bankruptcy process.

Complete Credit Counseling

Before filing for bankruptcy, you are required to complete a credit counseling course from an approved agency within 180 days before filing.

Complete a Debtor Education Course

After filing for bankruptcy, complete a debtor education course to learn how to manage your finances effectively moving forward.

Follow Through on the Bankruptcy Plan

For Chapter 13 and Chapter 11, adhere to the repayment plan approved by the court. For Chapter 7, cooperate with the trustee in the liquidation of non-exempt assets.

Rebuild Your Credit

After the bankruptcy process, take steps to rebuild your credit. This can include getting a secured credit card, paying any remaining debts on time, and gradually applying for new credit to demonstrate financial responsibility.

Bankruptcy can provide relief from overwhelming debt, but it’s a significant financial decision with long-lasting consequences. It’s essential to approach it with a clear understanding and a strategic plan to recover and rebuild financially post-bankruptcy.

Growfin book a demo

Don't miss these stories: