Understanding The Bankruptcy Options Available To Small Businesses

Law Blog

A bankruptcy can represent a lot of different things for a business. For some, it's a good way to relieve the pressures of debt. For some others, it's a way to restructure and renew. There are three viable options for filing for bankruptcy if you have a small business. Each of these represent a core objective.

  • Chapter 7 - Liquidation
  • Chapter 11 - Reorganization
  • Chapter 13 - Repayment

There is also Chapter 12, but it's strictly dedicated to farmers and fishermen. It has its own special provisions.

Chapter 7: Getting Rid of it All and Letting the Business Go

Some may consider Chapter 7 the "nuclear option," but there are many situations where it's the only choice you may have. When filing Chapter 7 as a small business, you are saying that you owe too much in debt than own in assets. This option works for all business types, including sole proprietorships if you can show it's business debt and not personal.

When filing Chapter 7, you will have to offer up your business assets for sale. Unlike a personal bankruptcy, which has exemptions, business bankruptcy often means the trustee can sell every business asset.

Because Chapter 7 may require you to sell, or offer for sale, every asset of the business, it's possible you will have nothing left to run the business with in the aftermath. That's why this option is typically reserved for those that are willing to forfeit the entirety of their business.

Chapter 11: Restructuring for Future Business Profit

Chapter 11 is the only dedicated business bankruptcy type. It's a restructuring and organization bankruptcy where the business can pay debt while still operating. You can think of it as a business version of a debt consolidation service. Business assets aren't forfeit since the assets are required to run the business and generate the income to pay the debt.

This process can become quite complicated and expensive to maintain. However, businesses that make it out of this process are often stronger for it. You should consider Chapter 11 if you want your business to continue after the bankruptcy process. Also, Chapter 11 is not for sole proprietorships or any business that's owned and operated by a single person, yet, individuals can apply for it.

Chapter 13: Repaying Debt to Keep the Business Going

You can think of Chapter 13 as a process midway between a Chapter 7 and Chapter 11 bankruptcy. Understand that businesses technically cannot file for Chapter 13. Corporations, LLCs, and other business structures must file Chapter 11. The caveat is that you can file Chapter 13 if you file as an individual but include business debt in your filing.

Chapter 13 allows you to pay debt while keeping the business alive. It's another form of restructuring, like Chapter 11, just not specifically geared towards larger businesses.

Chapter 13 requires that you put all disposable income towards paying debt. Also, the Chapter 13 process happens far quicker than the Chapter 11 process.

There are also debt limits when it comes to Chapter 13. You will have to file as an individual, but if your business related debt is higher than the limit, you will have to file Chapter 11.

Speak to a Professional First

It's important that you know which bankruptcy option will work best for your particular situation. In fact, it's important that you know if bankruptcy is the right choice for your business at all. The financial laws involving bankruptcy can become extremely complicated when it comes to businesses, so it may be beneficial to talk with a finance lawyer, such as Philip L. Burnett, Attorney At Law.

You should definitely speak to a financial or business professional about your bankruptcy considerations before you attempt the process. You may find that you don't need to take the bankruptcy option or that it wouldn't be a good idea after all.


5 August 2015

Knowing Your Legal Rights Can Help You Greatly in Life

Like many people, I once found learning about law very intimidating. My brother went to law school and I remember glancing through a few of his books and wondering if I was actually reading English due to all of the legal jargon in them! However, when I ended up in a sticky legal situation due to accidentally breaking a small law I didn't know existed, I realized that I needed to learn more about the law, so I could make sure to follow it precisely in the future. My brother helped to break down some complicated legal concepts to me, and I have since been studying up online. I want to post what I have learned and continue to learn about law in the future on my new blog, so my knowledge cannot only help myself, but also help others!