As a result, partners may be facing a suit by a well funded trustee suing for the benefit of all creditors of the partnership. The bankruptcy could then be converted to Chapter 7 or dismissed if bankruptcy protection is no longer needed. The court will probably condition dismissal of the case on payment to creditors of the sale proceeds. The division of debt between secured and unsecured guides what reorganization can do for the business. 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.