Bankruptcy for Businesses
The challenges faced by many small businesses can be too much, resulting to these firms thinking if filing bankruptcy would be a beneficial move for them. Bankruptcy is a process that individuals or companies go through to help them eliminate or repay their debts which have increased to an amount that is impossible to manage. Individuals file for personal bankruptcies, while the type filed by firms is business bankruptcy, which could either be liquidation bankruptcy or reorganization bankruptcy.
The specific bankruptcy chapter that a business may file depends on its form of business. Sole proprietorships, which are legal extensions of the owner can file business bankruptcy under Chapter 7, Chapter 11, or Chapter 13. Partnerships and corporations, on the other hand, being legal entities separate from their owners, can file business bankruptcy under Chapter 7 or Chapter 11.
For a firm that really has no future, has no substantial assets, or whose debts are so overwhelming so that restructuring it would not amount to any benefits, Chapter 7 business bankruptcy may be the best option. A firm filing Chapter 7 bankruptcy, also called liquidation bankruptcy, means, however, that business operations are over.
The firm itself, and whatever assets it has, will have to be surrendered to a court-appointed trustee who, in turn, will need to liquidate these and use the amount earned to pay the firm’s creditors. At the end of the bankruptcy case, the sole proprietor will receive a “discharge,” which will releases him/her from any further obligation in connection to the debts (this discharge is not available to partnerships and corporations).
If a firm still has a future, then Chapter 11 business bankruptcy should be the chapter to be filed. This chapter involves a plan wherein financial reorganization is made and the firm allowed to balance its income and expenses, continue earning profits, and continue operations. Reorganization is made under the guidance of a court-appointed trustee, who may also happen to be the owner of the company.
While it is true that many small corporations, limited liability companies, and partnerships shy away from Chapter 11, due to its risks and complexity, aside from being time-consuming and expensive, many still choose it because it is the only bankruptcy chapter that allows firms to restructure while continuing operations.
Chapter 13 business bankruptcy, the third option, but only for sole proprietors, allows business owners to restructure their debt payment plan. For sole proprietors to qualify under Chapter 13, however, their unsecured debt should not be more than $383,175, and their secured debt, not more than $1,149,525.
At bradford-law.com, it is explained that even the most well-run businesses may suffer from periods of financial distress for a variety of reasons. When issues related to debt and financial difficulties become overwhelming, business owners may be left wondering what options are available to them. For many companies, Chapter 7 bankruptcy may be an attractive and effective solution to their problems.