Business Bankruptcy: Understanding the Implications
Filing for bankruptcy can sometimes help a business stay afloat. In certain cases, filing for bankruptcy can sometimes help the business not only survive, but thrive. If you are looking to file for business bankruptcy, the type of bankruptcy you choose will largely depend on the type of business you own, the configuration of the business, the assets involved, and the amount of revenue available for a payment plan.
Factors to Consider When You Plan to Continue the Business
Is business bankruptcy right for you? Consider the following factors:
- Is the business producing revenue?
Consider closing down the business if it has been losing money consistently. Sometimes an economic downturn can harm any business. If your business has been unable to produce a profit because of harsh times, it may be a good idea to weather the storm. However, do not invest too much in a company that has no means of ever making a recovery. Figure out if your business is suffering due to the economy, or if there has been a pattern of lost revenue.
- Are your business’ assets valued above all liabilities?
If the business has assets that surpass the liabilities it holds while continuing to make a profit, the company may be worth saving. Restructuring the accumulated debt in bankruptcy, or completely eliminating the debt if you are a sole proprietor, may be the perfect solution to keep the business standing.
In some situations, a bankruptcy is not a reasonable solution. If this is the case for your business, consider closing the business. Once you close the business, you can liquidate the property to pay off the businesses’ debt. In many cases, this route will save you funds and help to pay off the outstanding debt.
- Are you responsible for any debts attained by the business?
As a business owner, if you are responsible for any debts acquired by the business, it may be wise to keep the business open. Do not take on more debt when attempting to save the business, as the business may only remain open while you negotiate terms with bank creditors. If you have closed your business before negotiating with your creditors, creditors will likely attempt to claim your personal assets to pay any remaining debts. This is particularly true if your business no longer had enough assets to cover the outstanding debts. Another way to protect against personal liability for the financial losses of a business is to file for Chapter 7 bankruptcy. This will wipe out the personal guarantee and responsibility of the business’ losses.
Bankruptcy Types: Which is the Best Type for You?
Trying to figure out what bankruptcy type is best for your situation? The answer depends on the type of business you have, as well as the value of the business’s assets.
The following list briefly describes the general philosophy behind each bankruptcy type.
- Filing for a Chapter 7 Bankruptcy as Limited Liability Company or Corporation
For the most part, filing for a Chapter 7 bankruptcy will determine the closure of a business. This is because is no means of protection for a business owned by a separate entity. This applies to limited liability companies and corporations. In this scenario, the trustee will sell the business assets in order to pay the creditors, and the company will simply shut down.
- Filing for a Chapter 7 Bankruptcy as a Sole Proprietor
While filing for this type of bankruptcy will seldom work to the advantage of a business owner, Chapter 7 bankruptcies could help a business owner. He or she can keep the business open if he or she is the sole proprietor who is providing a specific service. This can be in the form of freelance writing, accounting, or even for fitness trainers. This form of bankruptcy can benefit the proprietor because a bankruptcy trustee will be unable to sell the proprietor’s ability to perform the service offered by the business.
- Filing for a Chapter 13 Bankruptcy as a Sole Proprietor
It is important to recognize that businesses in the form of corporations, partnerships, or limited liability companies cannot file for a Chapter 13 bankruptcy. Chapter 13 bankruptcies can only be filed by sole proprietors. In the event that a business continues to produce a revenue, a Chapter 13 bankruptcy may be the best option.
- Filing for a Chapter 11 Bankruptcy
The following types of business must file for a Chapter 11 bankruptcy to reorganize their debts while staying open:
- Limited liability companies,
- Corporations, and
Although not required, a sole proprietor may file for a Chapter 11 bankruptcy as well. Both Chapter 11 bankruptcies and Chapter 13 both help the business stay afloat while configuring a repayment plan. However, Chapter 11 is more expensive and comes with more more terms and conditions.
Obtaining Legal Support for Business Bankruptcy
Filing for bankruptcy can be a complex and frustrating matter. When considering a business bankruptcy, speak to an experienced bankruptcy attorney. He or she can guide you through the process and explain the best options for your situation.