A Brief Look at Business Bankruptcy

A Brief Look at Business Bankruptcy

Business bankruptcy is a situation wherein a business organization has more liabilities than assets and is no longer capable of meeting its financial obligations. Any type of business can file a business bankruptcy case.

Business bankruptcy can provide relief to the business owner who is overwhelmed with credit problems and cannot find any other way out of debt. However, business owners must also face the fact of losing one’s business and damaging one’s credit standing and endure embarrassment. Although, in a businesses setup there is not much stigma attached to bankruptcy as it is in fact used by many businesses to restructure their companies.

Choosing what type of business bankruptcy to file is also not a very simple task. Business bankruptcy has different types, each with its own set of rules. The type of business bankruptcy that you can file depends on the type of your business.

Corporations and partnerships can file Chapter 7 bankruptcy or Chapter 11 bankruptcy. In proprietorships, Chapter 7, Chapter 11 or Chapter 13 bankruptcy may be filed. The basic difference here is in proprietorships, the owner files the business bankruptcy case. While in corporations or partnerships, which are legal entities separate from the stakeholders, the corporation is the one declaring bankruptcy and the case does not directly affect the stakeholders.

Here are the types of bankruptcy proceedings that can be used by businesses and business owners:

Chapter 7 – In this case, the debtor’s non-exempt assets, if there are any, are liquidated to pay off as much of the debt as possible. At the end of the case, the debtor will receive a discharge of its debt by court’s order. Businesses or individuals may file Chapter 7 bankruptcy.

Chapter 11 – Large businesses often use this type of business bankruptcy, wherein the debtor is allowed to keep his assets and continue the operation of the business as supervised by the court. Chapter 11 offers a lot of flexibility to a business who is considering business bankruptcy but its complexity makes it an expensive option.

Chapter 13 – This option is available only to individuals with regular income. There are specific requirements as to how much debt a person or business has in order to be eligible. A payment plan is arranged over three to five years where the debtor is expected to make monthly payments to a trustee. The amount of the payment depends on the income of the debtor. Debts that are not paid at the end of the payment plan are wiped out.

Filing a business bankruptcy is a serious decision and one that should be considered only when all other options have been tested. It would be wise to seek advice from a finance and legal professional before making any decisions.