Using personal bankruptcy can help a small business get rid of their liabilities and can help give them a fresh start. You may choose either Chapter 7, 13, or 11 bankruptcy depending on the situation of your company and your current assets.
Every business, however, is not in a position to file bankruptcy. There are several aspects to consider before a business takes this bold decision. For example, if you wish to keep your business open, have a sufficient amount of cash flow, and can make monthly payments, then Chapter 11 bankruptcy would suit your needs.
On the other hand, if you do not have sufficient cash flow and you wish to close down the business efficiently, then you should apply for Chapter 7 bankruptcy. Chapter 13 Bankruptcy is used if the sole proprietor wishes to keep the business running.
A wrong choice can have disastrous effects on the financial situation of the person under discussion. It is better to consult an expert in the field before filing a case. The first thing you need to consider before filing for bankruptcy is to see whether your business is in a partnership or is a sole proprietorship.
We will discuss bankruptcy options for sole proprietors, small business partnerships, and corporations and how they affect each party.
1. Filing for Chapter 7 Bankruptcy as Sole Proprietors
If a business owner has decided to close down a business, then they can use Chapter 7 bankruptcy. This helps the business owner discharge their business and personal debts and erases their personal record, which gives them a fresh new start if they are looking to invest in new ventures.
This is not in the case of Chapter 11 and 13 filings in which a creditor payment is required. A time period of 3-4 months is required for the completion of Chapter 7 bankruptcy filing. Chapter 7 Bankruptcy may seem like the perfect option for home businesses that want to close down, but there is a downside that one cannot ignore – once you file for Chapter 7 Bankruptcy, your property will become part of the bankruptcy estate.
You will only be allowed to keep only the assets that fall in the “exempt” section. These can be your home, car, clothes, etc. For a filer, a Chapter 7 bankruptcy could mean they will be losing property and other valuable assets too if they will be filing for a Chapter 7 Bankruptcy.
Chapter 7 Bankruptcy allows business owners to keep a “service-only” business when they file for this type of Bankruptcy. This means you can save your business if you are providing a service such as a freelance writer, an accountant, a carpet cleaning service, or if you are a handyman. A lot of states also exempt equipment that might be needed to provide these services.
2. Filing for Chapter 11 or 13 Bankruptcy as Sole Proprietors
If you wish to continue your business even after filing for bankruptcy, then you can either opt for Chapter 11 or Chapter 13 Bankruptcy. You can choose between Chapter 13, Chapter 11, or Subchapter V depending on your debt limits. In most cases, you will be allowed to continue operations once you file for one of these Bankruptcies.
You should be able to have an adequate amount of cash flow, though, which can help keep your business up. The plus side is that you will not be giving away your property, which makes it easier to run business operations. There is a catch, though – you will be paying your creditors money, which will equate to the value of the non-exempt property via the repayment plan.
Moreover, you will need to prove that you are making enough money that will support your case. In case you are unable to protect your business equipment as you are unable to pay the value via the plan, then Chapter 13 Bankruptcy is not a valid plan.
Chapter 11 Bankruptcy is quite similar to Chapter 13 Bankruptcy. A business that file For Chapter 11 Bankruptcy keep their assets and pay the creditors via a repayment plan. However, unlike Chapter 13, Chapter 11 can be a tad bit complicated due to extensive and continuous reporting procedures. Moreover, it tends to be extremely expensive for small businesses to keep up with such procedures.
3. Filing for Chapter 7 Bankruptcy as Small Business Partnerships and Corporations
As a business closes down, there are multiple aspects that need to be taken care of. When a business is divided between partners, it becomes the responsibility of all the stakeholders to liquidate the assets and divide them between the creditors. If the small business has a large number of assets in its name, then using Chapter 7, Bankruptcy can make the process much easier.
There is an increased amount of transparency, and the closing down process can take place much more smoothly. Moreover, it lessens the chances of any creditors claiming fraudulent activities, and stakeholders have lesser chances of raiding the asses at the time of company closure.
4. Filing for Chapter 11 Bankruptcy as Small Business Partnerships and Corporations
Since Chapter 13 is only available for sole proprietors. A small business partnership or corporation can file for Chapter 11 Bankruptcy if they wish to keep their business running and pay fewer debts. Previously small business was reluctant to file for Chapter 11 Bankruptcy as there was an increase in rights given to creditors along with increased legal fees. However, there has been a relaxation in this regard, and small businesses are given the option to restructure their debts.
Whether your business is owned by a sole proprietor, partnerships, or corporation, it can be a complicated procedure to file for business bankruptcies. If you are thinking of filing one, then it’s best to take help from an advisor or an attorney who is well-versed in all the legal procedures regarding business bankruptcies. This way, you will be able to get financial reassurance and the best deal on the table for your home business.
Arslan Hassan is an electrical engineer with a passion for writing, designing, and anything tech-related. His educational background in the technical field has given him the edge to write on many topics. He occasionally writes blog articles for London carpet cleaning.