Despite a business owner’s best intentions, some small businesses just don’t make it and bankruptcy is the result. Businesses fail for multiple reasons and owners go through the bankruptcy process in federal court to repay or eliminate debts. A corporate bankruptcy can be described as a reorganization or a liquidation depending on the type chosen.
Different Types of Business Bankruptcy
Businesses can file for three kinds of bankruptcy depending on their form. A sole proprietorship is a legal extension of the business owner, and that person is responsible for all liabilities and assets. Sole proprietors can choose from chapters 7, 11 and 13. A corporation is a separate legal entity, and a corporate bankruptcy attorney can handle either chapter 7 or 11.
Chapter 7 is the best choice when there’s no hope of saving the business. Usually referred to as liquidation bankruptcy, it’s used when a business’ debts are insurmountable. Chapter 7 is a good choice when the business lacks substantial assets, and it typically means that the business is closed forever. In this type of bankruptcy, the court appoints a trustee to take the business’ assets and sell them to repay creditors. After the process is complete, the proprietor receives a debt discharge.
Also called reorganization bankruptcy, chapter 11 is a good option for businesses that might have a chance. In chapter 11, the company reorganizes and continues operations under a trustee’s observance. The company files a reorganization plan that details how creditors will be paid; if the creditors and the court approve the plan, it will be completed over the next few years.
Chapter 13 is a consumer reorganization bankruptcy, but it can be used in sole proprietorships. The repayment plan is filed with the court, and the amount to be repaid depends on the business owner’s earnings, debt and assets. If a person’s business and personal assets are mixed, the client can avoid losing their house by filing chapter 13 rather than chapter 7.
Filing for bankruptcy is never an easy decision, and it should only be made after careful consideration. Consult a local corporate bankruptcy attorney before deciding whether to file, or which type to choose. An attorney with Hogan & Associates P.C. can recommend other options, and they can guide clients toward the best possible decision. You can also connect them on Facebook for more updates.
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