Bankruptcy is a touchy subject, but if your business is having financial problems and you can’t pay your creditors, you might have to seriously consider it. However, not all forms of bankruptcy are considered equal and, depending on how your business is structured, not all forms may apply.
Below is a list of the different types of bankruptcy, and information on which would apply in a business context. This list is by no means exhaustive, but it can give you an idea of what to expect. Bankruptcy law firms can give you more information on the specifics of bankruptcy law, foreclosure actions and collection proceedings.
Types of Bankruptcy
There are four types of bankruptcy that could be used in a business context. These are Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
Chapter 7 is also referred to as Liquidation, or “the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.” Whatever debts are not paid by the liquidation are written off by the courts. Chapter 7 is usually filed by individual debtors, but a business may be able to go this route if the owner is a sole proprietor and the business assets are combined with his personal assets.
To qualify for Chapter 7, the business must have no future and must lack substantial assets. This means your business has no chance of recovering or repaying its creditors.
You must also be willing to sell or give up any assets designated as nonexempt. Nonexempt property could include bank accounts, stocks and bonds, and vehicles. For example, if you run a delivery business and purchased several cars, you might have to relinquish all but your personal vehicle. However, if there is a lien on your personal vehicle, you will have to return it to the creditor.
Chapter 11 is also referred to as Reorganization, and it is specific to businesses. Under this chapter, you would present a plan to the courts to reorganize your business in order to pay your creditors, and the court appoints a trustee to oversee the process.
Chapter 11 is best suited for corporations or partnerships, but sole proprietors could also qualify. However, this type of bankruptcy could involve liquidating some assets as part of the reorganization process, for a sole proprietor this could mean that some of his personal assets are liquidated along with the business assets.
Chapter 12 is also known as the Family Farmer or Family Fisherman bankruptcy. This type of bankruptcy only applies to family farmers or family fishermen with regular annual income. It’s designed to allow you to pay off your creditors in installments, over three to five years, and allow you to keep some of your assets.
For example, if you purchased several new tractors and are now having trouble making payments, you can present a repayment plan to the courts which ensures that your creditors get their money, and you can keep the tractors you need to keep your farm running.
As with the Chapter 11, the court will assign a trustee to manage the payment process.
Chapter 13 is also known as Individual Debt Adjustment. This chapter is specifically for individuals with regular income who might be able to pay off his debts with some assistance. Chapter 13 usually applies to individual and not business debts, but a sole proprietor might qualify if his business and personal assets are combined.
Similar to Chapter 12, under Chapter 13 the debtor sets up three-to-five-year repayment plan with his creditors, which allows him to keep some of his assets. Also, the court will appoint a trustee to oversee the repayment process.
As you can see, each type of bankruptcy serves a specific purpose and applies in specific situations. If you are considering bankruptcy for your business, your best bet is to consult a bankruptcy attorney. A qualified attorney can tell you which type of bankruptcy is best for you, and can also help you file to ensure things run smoothly.