Hidden traps in proceeds from collateral Misuse of the the proceeds of a secured creditor's collateral can create a non dischargeable debt for the individuals involved. Sales taxes are trust fund taxes in some jurisdictions, as well. Payments to insiders on old debts may be recoverable Repayments to relatives and business decision makers on their claims against the debtor can be recovered by the bankruptcy trustee under certain circumstances. Bankruptcy reorganization in Chapter 11 requires significant time on the part of the owners and managers to comply with the requirements of the bankruptcy system. Legal expenses are significant.
Most reorganizations fail, usually for lack of a real plan to solve the problems.
Businesses that require little capital, have few assets, or are really just extensions of the owner's skills and personality are ones that it may not pay to reorganize. The owners may be better off liquidating the business, in or out of bankruptcy, and starting over in a fresh entity. This can be a complex issue and requires good professional advice to do correctly. When Chapter 7 is best A Chapter 7, whether for the individual or a corporation, may be the best choice when the business has no future, it has no substantial assets or qualities that cannot be reproduced, or the debts are so overwhelming that restructuring them is not feasible. Individuals can get a discharge of the dischargeable debts and a chance to start over.