Most entrepreneurs don’t go into business expecting to go into overwhelming debt. It can be heartbreaking when that happens, and it’s stressful for business owners who have to decide what to do next. One of the options is filing for bankruptcy.
Several types of bankruptcy can help business owners take control of their debt, and each has specific benefits, drawbacks, and requirements. For more information about how your small business can benefit from bankruptcy, talk to a local bankruptcy lawyer for legal advice.
Bankruptcy is just one option for businesses struggling with debt. Companies can get an automatic stay against debt collection. After bankruptcy, the business can get a fresh start. But there are several factors to consider before filing for bankruptcy.
You or your legal counsel may negotiate with your creditors and come to an out-of-court agreement or settlement that gives you time to stay open and pay without a bankruptcy filing.
One drawback to filing for bankruptcy is the lack of privacy. You must open all your books to the bankruptcy court. All the documents you file with the court become part of the public record.
You also have to determine whether you want the business to continue operating. If the business isn’t profitable, bankruptcy proceedings can liquidate its assets to pay its creditors and close the business for good. If you wish to remain open and operating, you must consider whether:
- You have a plan for profitability
- Existing management can execute that plan
- Your business is willing to follow court-ordered restrictions in the bankruptcy process
If you choose to file for bankruptcy, there are different types — referred to by their chapters in the Bankruptcy Code — that apply to specific debt, reorganization, and operation scenarios.
In a Chapter 7 business bankruptcy, the bankruptcy trustee will liquidate (sell) the company’s assets to satisfy its outstanding debts. While this type of business bankruptcy might work for some larger businesses, it is usually suited toward smaller businesses that are not interested in remaining in business.
In some cases, partnerships and closely held business entities might not do well under filing Chapter 7 bankruptcy because it may put the owners’ personal assets at risk, subject to exemptions.
Chapter 11 small business bankruptcy is one of the most common forms of bankruptcy for businesses. Under this chapter, courts reorganize the business to ensure creditors will get paid.
This isn’t a quick answer to financial troubles for a business. Instead, it is a long process that requires presenting financial records and reports to the court. Small business owners should know that in Chapter 11 bankruptcies, unless the court approves the plan, a certain number of creditors must accept the reorganization plan to proceed.
The plus side of this type of bankruptcy is that you maintain control of your company. You don’t have to shut it down and allow the court to liquidate the assets.
Chapter 12 bankruptcy is for people who are in business as farmers or fishermen. The requirements to file for a Chapter 12 bankruptcy vary for each industry.
Unlike Chapter 11 or Chapter 7 bankruptcy protections, Chapter 12 allows these seasonal business owners to make payments on their bankruptcy in your income-bearing months. This can take some of the strain off during the months you are not making money.
Chapter 13 bankruptcy is also used to restructure or reorganize debt and can apply to debtors “engaged in business.” This includes self-employed people but not one-person partnerships or corporations. You may not qualify for Chapter 13 bankruptcy unless you have regular income and a certain amount of secured and unsecured debt limits.
Like Chapter 11, you can continue operating your business while creating a plan outlining how you will repay your debts. You must use all your disposable income to repay creditors for three to five years, and the bankruptcy court will appoint a trustee to oversee repayment.
Once you complete all required payments and meet other bankruptcy case requirements, the court will discharge the debt covered in the repayment plan. One of the advantages of filing under Chapter 13 is that it can stop foreclosure proceedings and give you time to pay late mortgage payments. But homeowners will still need to make all scheduled mortgage payments during the Chapter 13 plan.
No business owner wants to think of their business going under. Business bankruptcy protections can help business owners drowning in business debt. But navigating the bankruptcy law eligibility requirements, court proceedings, and possible restructuring is not easy.
Seeking the help of an experienced bankruptcy attorney can protect your rights and best interests when seeking financial relief.
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