The challenges faced by many small businesses are sometimes too much, resulting to these firms thinking if filing bankruptcy would be a beneficial move for them. Bankruptcy is a process that individuals or companies go through to help them eliminate or repay their debts which have increased to an amount that is quite impossible to manage. While individuals file for personal bankruptcies, the type filed by firms are business bankruptcies, which are either liquidations or reorganizations.
The specific bankruptcy chapter that a business may file depends on it form of business. Sole proprietorships, which are legal extensions of the owner (making an owner of a business firm responsible for all assets and liabilities of his or her firm), can file business bankruptcy under Chapter 7, Chapter 11, or Chapter 13. Partnerships and corporations, on the other hand, being legal entities separate from their owners, can file business bankruptcy under Chapter 7 or Chapter 11.
For a firm that really has no future, has no substantial assets, or the debts of which are so overwhelming so that restructuring it would not amount to any benefits, Chapter 7 business bankruptcy may be the best option. A firm filing Chapter 7 bankruptcy, also called Liquidation bankruptcy, simply means that business operations are over.
The firm itself, and whatever assets it has, will have to be surrendered to a court-appointed trustee who, in turn, is tasked to liquidate these and use whatever amount is earned to pay the firm’s creditors. At the end of the bankruptcy case, the sole proprietor will receive a “discharge,” which releases him or her from any further obligation in connection to the debts (this discharge is not available to partnerships and corporations).
If the firm still has a future, then Chapter 11 business bankruptcy would be the ideal choice. This chapter involves a plan wherein financial reorganization is made and the firm allowed to balance its income and expenses, continue earning profits, as well as operations. Reorganization is made under the guidance of a court-appointed trustee, who may also happen to be the owner of the company.
While it is true that many small corporations, limited liability companies, and partnerships shy away from Chapter 11, because it is risky, complex, time-consuming and expensive, many still choose it because it is the only bankruptcy chapter that allows firms to restructure and continue operations.
Chapter 13 business bankruptcy, the third option, but only for sole proprietors, allows business owners to restructure their debt payment plan. For sole proprietors to qualify under Chapter 13, however, their unsecured debt should not be more than $383,175, and their secured debt, not more than $1,149,525.