Business Bankruptcy – Which Type is Right for Your Business?

In a Chapter 7 bankruptcy, the assets of the business are sold by the bankruptcy trustee to pay down the debts owed by the business. Creditors are paid according to their priority, to the extent assets exist, and the business ceases to operate. Priority is determined by how the credit was extended to your business. Secured creditors (those who extended credit tied to a specific asset, such as a building or vehicle) are paid first from the sale of those assets. Unsecured creditors and shareholders are paid from any remaining funds after secured creditors are paid.

If your business is a sole proprietorship, you will have to file bankruptcy as an individual, since there is no legal distinction between you and your business. If you are a small business owner whose business is not a sole proprietorship but you provided personal guarantees for certain business debts, you may want to consider filing for Chapter 7 bankruptcy for yourself, as an individual, and for the business, since a business Chapter 7 bankruptcy will not eliminate your personal liability for business debts. 

When your business declares Chapter 7 bankruptcy, the businesses ceases all operations unless the business is a sole proprietorship – in that case, you may receive personal exemptions in the bankruptcy that may allow you to continue to do business. Chapter 7 bankruptcy is usually the best choice when the business has few assets and intends to stop operating entirely.

Chapter 13 bankruptcy is not available for incorporated businesses, but may be used for individuals who operate their business a sole proprietorship. It is typically the best form of bankruptcy for those with a regular income but large amounts of debt. 

Filing for Chapter 13 bankruptcy results in a payment plan to eliminate your debt over time. Monthly payments are made to the bankruptcy trustee, usually for a period of 3-5 years, before the bankruptcy is concluded. The plan is developed with input from your creditors, who may object to a proposed plan before it is approved. Once the plan is approved, you and your creditors are required to abide by the plan; no further collection efforts may be taken against you, and your property is protected from a forced sale.

A Chapter 13 bankruptcy essentially allows you to reorganize your debt without selling off all of your assets, which means you can continue to run your business as a sole proprietorship. Even if your business is not a sole proprietorship, you have personal liability for business debt, you may wish to consider Chapter 13 bankruptcy to eliminate your personal liability for business debt as an alternative to Chapter 7 bankruptcy. 

Chapter 11 bankruptcy is for businesses and high net worth individuals. It is much more complicated and expensive than a Chapter 7 bankruptcy.

Chapter 11 bankruptcy is similar to a Chapter 13 bankruptcy but for businesses, rather than individuals. Instead of eliminating your business debt by selling off assets of the business, in a Chapter 11 bankruptcy, your business debt is reorganized and debts are paid through a payment plan, which is approved by the bankruptcy court. Terms of payment with creditors are renegotiated and your business continues to operate.

Chapter 11 bankruptcy gives you an opportunity to restructure and operate your business more efficiently to reach financial health in the future. When filing for Chapter 11 bankruptcy, you may choose to downsize by selling some of your business’s assets or divisions to help pay down some of your business debt and improve operating efficiency.
Chapter 11 bankruptcy may be most appropriate form of bankruptcy if your business wants to continue operating, but needs more time to pay unsecured debts or taxes; has unprofitable leases; wants to reduce excessive secured debts such as mortgages or liens that exceed the value of the property by selling or re-negotiating; or has unnecessary equipment or business divisions and wants time to negotiate a favorable sale.

If you are considering exploring bankruptcy, you will need an experienced attorney to help guide you through the process. To quickly and easily find the perfect bankruptcy lawyer, quickly post a short summary of your legal needs on Legal Services Link, and let attorneys come to you.