Declaring business bankruptcy: basic overview

Deciding whether or not to declare business bankruptcy

Having to decide whether or not to declare bankruptcy is a hard decision for a business owner. Starting a business requires a substantial investment of time, money and resources to secure all the parts needed to run successfully – but even after crossing these things off of the list, nothing is guaranteed.

If you’ve tried all you can but your business is struggling to stay afloat, it may be time to consider your options and file for bankruptcy.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is typically designated for individuals only, however since sole proprietors manage their business as an individual, they can claim this option as well. Chapter 7 is more extreme than other forms of business bankruptcy in that an appointed trustee liquidates the entire business and portions it out to creditors.
This option can provide relief for business owners that are overwhelmed by debt and can’t come up with a reasonable way to pay it all off, however on the opposite side of this, filing Chapter 7 usually means the business doesn’t have a future. Therefore business owners will need to give serious thought before filing, and determine if they are okay with letting the business go.

Chapter 11 bankruptcy

If you feel there’s a way that you can turn your business around, Chapter 11 helps secure the future of the business through reorganization. The reorganization is done under an appointed trustee, and the company devises a plan for how it will pay back creditors. Once this plan is made, it is presented to the creditors, who will vote on whether they will or will not accept these terms.

If the creditors vote in favor and the court finds the plan reasonable, it will be enacted and the business will have an extended amount of time to make creditor payments. While this gives businesses some breathing room, this process takes a lot of work and could take several months to a year to enact.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is typically reserved for individuals and sole proprietors, and like Chapter 11, uses reorganization to pay down debts. The applicant will file with the bankruptcy court and provide a thorough plan on how they plan to repay their debts. The court will provide a final decision on this plan based on the amount the filer makes each year, the property that person owns, and how much debt is in their name.

One disadvantage this could cause is that the court may come back and insist that you pay higher than your proposed amount based on the salary you make; but this option fares better for sole proprietaries in that any personal assets remain in their possession, rather than being liquidated as they would be if the business filed for Chapter 7 bankruptcy.

Minimizing the impact of a business bankruptcy

The decision to file for bankruptcy isn’t easy, but by working with an attorney to decide on your best option and develop a solid repayment strategy, the process is less tedious. No matter if you’re walking away from your business for good, or restructuring in order to better pay off your debts, it helps to get these discussions going and come face to face with the realities of your business.