The Process of Business Bankruptcy

No business, whether big or small, expects to fail when it begins. However, sometimes circumstances intervene and a business is forced to close. Many times when this happens, the business owner will choose to file for bankruptcy in order to protect themselves against financial liability as well as for other reasons. Depending upon the type of business, one of three types of bankruptcy may be used to make the transition as easy as possible for both the owner and any creditors the business may have.

Chapter 7 Bankruptcy

Commonly known as business bankruptcy, Chapter 7 is used when a business owner has no plans to keep the business going. This type is recommended when the business has no major assets and plans to liquidate, meaning the debts of the business are so extensive it has no future. Often used with sole proprietorship businesses, this process begins with a trustee being appointed by the bankruptcy court. The trustee then distributes the assets among the creditors in an attempt to pay off the debts. Once completed, the trustee is paid and the owner is then given a discharge, meaning they are released from any future obligations to the debts.

Chapter 11 Bankruptcy

Used by businesses that plan to continue operating, Chapter 11 involves developing a reorganization plan that the business files with the court. If the court and the creditors agree to the plan, the business can make payments to the creditors over the course of as much as twenty years if needed. A very complex procedure, Chapter 11 is not always successful for businesses. In addition, a Chapter 11 reorganization plan can take up to one year to be approved, so it is not a quick or easy process.

Chapter 13 Bankruptcy

Known as personal bankruptcy, Chapter 13 can also be used with a sole proprietorship business where both personal and business assets are intertwined. Under this plan, a repayment plan is filed with the court outlining how the debts will be repaid. How much is paid back depends on many factors including a person’s income, the amount of debt owed and how much property they own. The major advantage of Chapter 13 is it can keep a sole proprietor from losing their home and other personal assets due to the failure of their business, making it easier for them to get back on their feet financially and satisfy their obligations.

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