The question of what exactly happens when a business files bankruptcy is something that any business owner should be aware of, since it is different than when a consumer files for personal or individual bankruptcy.
Unfortunately, the reality is that many businesses file bankruptcy each year. There are many reasons this happens, but outside of a partnership where one of the partners runs off with the business money (which is a legal matter), there are various reasons that this is the case. Very often this is due to inadequate market planning, and the second most common reason is financial mismanagement.
For market planning, anyone planning to open a business must do enough market research in the particular geographic area where they plan to open this business to make sure that there is sufficient demand for the products and services that will be offered. This is not just a couple of days worth of effort with surveys handed out during lunch time at the mall, but can often take weeks to complete adequately to ensure that there really is a market in this area that can sustain the business on an ongoing basis.
For financial mismanagement, this should not be construed as being necessarily a negative thing, but businesses are required to file a lot of paperwork with both the state in which they operate as well as the government. There are payroll taxes that need to be paid, filing fees, and this cannot be put off since there are rather stiff penalties that will cost even more money if these things are late. Many times a business will spend money on expansion in terms of equipment, computers, trucks, etc, before they are really ready to take on that financial obligation.
When a business files for bankruptcy, the impact is typically much more severe compared to when an individual consumer files bankruptcy, especially if the business is going to file Chapter 7 bankruptcy. The business must meticulously list each and every tangible asset that is attributed to the business, as well as listing all of their debt. If the business has bond holders and/or mortgage lenders that money is owed to, the business owner needs to be aware that these debts will not be discharged in a bankruptcy.
A creditor to whom the business owes money will typically secure the value of the outstanding balance via the assets of the business, and can in fact force the business to be dissolved. This can be catastrophic, especially in a smaller business since employees are usually the first ones to feel the impact, and it is not unusual for those employees to see what is about to happen and seek employment elsewhere before the axe falls. If there is outstanding payroll due any employee, unfortunately that employee must stand in line behind creditors to try to collect, and the reality is that they will never see that paycheck.
Typically, the most common type of business to go bankrupt in the US is restaurants. While a restaurant is one of the easiest businesses to open, it is also one of the most difficult to maintain and keep operationally profitable. If a restaurant does not have the customers to support the business, they have a huge amount of potential food that they have ordered and paid for which they will need to throw away. Employees are affected as well as the suppliers who sold goods to the business, and this eventually starts a chain reaction that unless the business owner is very financially savvy, can reach a point of no return before the business owner is even aware of it.
The best advice to give to a business owner considering bankruptcy is to become intimately knowledgeable about bankruptcy law. The law has changed significantly in recent years, and the more the business owner understands about his options, the less painful the whole procedure is going to be.