When a Corporation Can’t Pay Debts, Does it Lead to Bankruptcy?

When you own a business, you do everything that it takes to ensure that your assets are covered and that you are able to pay for any debts that arise. However, one year your business does not meet its goals or do as well as you were hoping for, and this leads to the debts piling up against you. When a corporation is unable to pay its debts, there are many consequences that might take place.

The Consequences of Not Paying Debt 

Repossession of Secured Property: What is secured debt? This is a type of debt that is secured by collateral so that it can reduce the risk associated with the lending process. A good example of this is how a mortgage works on a home. If the borrower (you) is unable to pay for the mortgage, then the bank will seize the property from you and sell it so that they can pay back the debt. Most corporations own property that is known as secured debt. When a corporation fails to pay for the debt that piles up against them, the creditor starts taking the secured property away from the corporation. There are many laws that state what a creditor is permitted to take. If there is any debt leftover once the property is sold, the corporation will be liable for paying it.

Litigation by Collections Agencies: When the corporation stops making its payments, creditors might choose to go right to litigation so that they can receive the money that they are owed. The creditor might be able to eventually garnish wages and seize assets so that they are able to pay off these debts. Because this is all made public, the corporation might struggle to gain credit in the future. 

Personal Liability: In some situations, individual shareholders might be liable for repaying debts that stem from a corporation. This is true in cases that are much like the co-signing process.

Bankruptcy: Lastly, a corporation might be facing the reality of bankruptcy if they are not able to repay their debt. Corporations are able to file for this process under what is known as Chapter 11 and Chapter 7 of the Bankruptcy Code. When a corporation chooses Chapter 11, they are able to reorganize their business. However, if they choose to go the route of Chapter 7 bankruptcy, they skip their chance at the recovery of their business. The business will then be shut down and the assets will be sold so that creditors are able to obtain their money.

Is Bankruptcy Right for Your Situation?  

If you are facing the reality of a Texas bankruptcy, you might be feeling lost and confused about the outcome of your case and whether or not your business will be able to move forward. At M.J. Watson & Associates, our skilled Texas bankruptcy attorneys continue to support businesses in one of the most challenging times of their lives. We realize that there are times of turmoil that come with owning a business and wish to offer our support at this time. Please contact our skilled bankruptcy attorneys at (214) 965-8240.