For small business owners that are struggling with debt, bankruptcy may provide some much-needed relief. They can file bankruptcy under Chapter 7, 11, or 13, based on the following factors:
the legal form of your business
whether any personal liability for business debts
whether they intend to close their business or keep it running, and
the amount and types of debts
Types of Bankruptcy
Liquidation Under Chapter 7 Bankruptcy
Filing under Chapter 7 bankruptcy results in the dissolving of the business as opposed to reorganization. During Chapter 7 bankruptcy, the business shuts down and the assets are divided among creditors. However, the assets that are forfeited depend on the business structure.
For Sole Proprietors
With Chapter 7, all your qualifying business and personal debts are wiped out including credit card debts, loans, back rent, utility bills, and lawsuit judgments (but not your tax obligations). However, you should remember when filing under this Chapter that sole proprietorships and their owners are not separate entities in the eyes of the law. So, your personal assets like your equipment, vehicles, etc. may be at risk.
For Partnerships and Corporations
Partnerships and corporations can also file bankruptcy under Chapter 7. However, unlike sole proprietorships, they cannot wipe out their business debts with Chapter 7 bankruptcy. Your bankruptcy trustee will sell the assets and evenly distribute the money to your creditors. While corporations protect shareholders from being personally liable for business debt, partners of a partnership must pay the business’s remaining debt to creditors even after the assets are sold.
Reorganization Under Chapter 11 and 13
Chapter 11 for Sole Proprietors
If you have enough incoming cash each month, you can make smaller payments to creditors and continue to operate your business by filing bankruptcy under Chapter 11. A sole proprietorship files under this Chapter if it doesn’t qualify for Chapter 7 bankruptcy, or wants to keep some assets that may be taken under Chapter 7.
Chapter 11 for Partnerships and Corporations
Partnerships And Corporations filing under Chapter 11 remain “in possession,” have the powers and duties of a trustee, may continue to operate their business, and may, with court approval, borrow new money, according to the information by the United States Courts. However, small businesses usually avoid this Chapter as it can be riskier, more time-consuming, and complicated than Chapter 7 bankruptcy.
Chapter 13 for Sole Proprietors
Although business entities cannot file Chapter 13 bankruptcy, business owners can do so in their individual capacity and take advantage of it if it makes sense for their specific circumstances, according to an article by Forbes. Similar to Chapter 11, it allows them to continue to run their business by reorganizing the debts and making smaller payments to creditors.
Considering Bankruptcy for Your Small Business? Consult A Skilled Bankruptcy Attorney
While bankruptcy should be one of the last options for you, it may be the best way forward given your unique financial situation. As a small business owner, you should look at all information about alternative options and consult with a qualified bankruptcy lawyer about your circumstances.