Filing for bankruptcy may be an option for a business that is failing or having difficulty financially. This is particularly the case for businesses who are unable to pay their creditors. Bankruptcy for businesses can be complex depending on the details.
Both the amount of debt and the way the business is organized will determine what type of bankruptcy the business must file. Due to the complex nature of bankruptcies for businesses, you may want to consult with a bankruptcy attorney before you take the step of filing for bankruptcy.
There are multiple types of bankruptcies that may be filed. As mentioned above, the amount of debt and the way the business is structured help determine what type of bankruptcy should be filed. Examples of ways businesses may be structured include: sole proprietorship, a limited liability company, a partnership or a corporation.
A Chapter 7 bankruptcy is one in which total liquidation occurs. It is available to individuals filing for personal bankruptcy, and to all types of businesses. However, when it comes to businesses, Chapter 7 bankruptcies are best suited to sole proprietorships and small businesses. This is because this type of bankruptcy is meant for businesses that have very little in the way of assets, and little chance of succeeding based on their debts.
Basically, filing Chapter 7 requires the business to close down completely in order for all of its assets to be liquidated. Also, sole proprietorships can receive a discharge from the court saying that they are no longer liable for outstanding debts at the end of their bankruptcy proceedings, but other types of businesses cannot receive a discharge under Chapter 7.
With Chapter 7, the business owner/debtor’s assets are taken by the bankruptcy trustee and sold off in order to pay for to pay the business’s debts. If, after the sale of all the business’s assets, there are still not enough proceeds to pay for all the debts, then the remaining debts are discharged.
Individuals filing private bankruptcy must meet income requirements (show that their income is low enough), but this is not a requirement for businesses filing under Chapter 7.
It should be noted that, whether the bankruptcy is for an individual consumer or a business, they will be barred from filing a Chapter 7 bankruptcy if they had a bankruptcy petition dismissed within the last 180 days for failure to appear in court, or to otherwise comply with the court’s orders.
In cases where businesses are having financial difficulty but who do not need to liquidate completely, reorganization can be the best solution. Chapter 11 is one type of reorganization bankruptcy. It is available to corporations, partnerships and sole proprietorships. It is most commonly used by corporations. This is a more complicated type of bankruptcy and usually takes a good while longer to complete than other types.
In this type of bankruptcy, the business must submit its reorganization plan to the court, proposing how and when it will pay off its creditors. It can allow for an extended period of time in which to pay creditors back. This type of bankruptcy is attractive because it helps businesses to keep operating.
Chapter 13 bankruptcies are another type of reorganization bankruptcy. They are primarily used by those filing personal bankruptcy, but they may also be used by sole proprietors. It still requires that a plan for reorganization be submitted to the court, showing how and when the business proposes to pay off its creditors.
One of the primary reasons why a sole proprietor may use this type of bankruptcy instead of a Chapter 7 is that the Chapter 13 bankruptcy will separate the business owner’s personal assets from their business assets. This means they don’t have to declare personal bankruptcy.
Chapter 13 will not work for larger businesses. It will only work for business that are quite small and don’t have many creditors, because there are limits on the dollar amount of debt that may be declared in this type of bankruptcy. There are different amounts for secured and unsecured debt, and the amounts may fluctuate, so this is something important to check when considering which type of bankruptcy to file.
Chapter 13 bankruptcies have shorter repayment periods than Chapter 11. Chapter 11 bankruptcies allow for longer repayment periods because they allow for larger amounts of debt.
Bankruptcies for businesses can be quite complex. If you are considering filing a business-related bankruptcy, you should contact a business attorney. The attorney can help determine whether bankruptcy is right for you, and, if so, what type of bankruptcy is best suited to your situation. They can then file the bankruptcy on your behalf and guide you through the process.