What you need to know about the Four Types of Business Bankruptcy

Business bankruptcy is a legal process by which an individual or business can find help in addressing their financial obligations. Before a business can file for bankruptcy, it is a good idea to contact an experienced bankruptcy attorney. These legal professionals can provide a deeper insight into the liquidation process and how to best approach.

business-bankruptcyOne of the first considerations is which Chapter of the law your business will file under. While Chapter 7 and Chapter 11 are the most common choice, there may be times when Chapter 13 or Chapter 12 would be more applicable.

Following is an overview of the various Bankruptcy Chapters:

Chapter 7 — the objective of Chapter 7 Bankruptcy is to liquidate the debtor’s nonexempt assets and use the proceeds to address the creditors. A trustee will be appointed to manage the proceedings and will begin by identifying and liquidating assets. The creditor will begin to file claims at the court once the trustee has recovered assets and completed the liquidation process. The assets can then be divided amongst the creditors who have filed claims and a portion of the proceedings will be used to cover the trustee’s fees.

Chapter 7 is applicable for the business that has no viable alternative to escape their financial situation as they income they are generating is not sufficient to cover the costs of debts. At this moment restructuring is a moot point, the only goal is to cut the losses and escape the business.

Chapter 11 —the goal of Chapter 11 bankruptcies is to allow the business or individual time to restructure their financial system and resume lucrative operations. After filing for Chapter 11 bankruptcy a company is allowed to continue their operations. The bankruptcy court will oversee these operations and the creditors will not be allowed to interfere. The debtor will have to meet with creditors to propose a plan to address financial obligations at least partially. If a proposed plan is not in the best interests of the creditors, they may file a competing plan.

Chapter 11 Bankruptcy is the best option for a business that is behind on payments but still in control of operations and in possession of assets.

Chapter 13 — while not specifically designed for companies, individuals may file for Chapter 13 Bankruptcy to cover debts accumulated personally in an attempt to open a business. In many cases, single business owners and those who operate private practices are covered.

After filing for Chapter 13 Bankruptcy the debtor must formulate a plan to address his obligations to debtors while still holding on to certain assets. In order to be eligible for Chapter 13, the individual must prove they can generate enough income to address a minimum portion of the debt load within 3 to 5 years. After this has been completed, within the terms outlined by the bankruptcy court, all additional debts will be discharged.
Note: certain debts will not be discharged including alimony, mortgages, child support

Chapter 13 bankruptcy is available to individuals who have become overloaded with debt due to the failed attempt at launching a business.

Chapter 12 — basically a mirror image of Chapter 13 Bankruptcy, Chapter 12 Bankruptcy is designed to address the financial needs of family farms. The provisions outlined within allow the family farm to remain in operations while reorganizing and addressing certain debts. Unlike other Bankruptcy Chapters, Chapter 12 provides considerations for the unpredictability and specific nature of the agricultural industry.

In Closing — if you think your business is floundering in financial distress, contact an experienced legal advisor. Bankruptcy lawyers can listen to the details of your situation and provide assistance in escaping your current conundrum.