Bankruptcy Information for Businesses

It takes a special kind of person to start a business. Unlimited energy, tunnel vision and a forgoing of free time is often required when an entrepreneur takes that first step toward his dream of building a successful business. But, sometimes despite all that energy and hard work, a business simply doesn't succeed, and that dream threatens to become a financial nightmare.


Flailing small business owners are often forced to forgo their dream. Some simply close their businesses, swallowing the debt themselves. Others, who are financially devastated, file for bankruptcy.

The process of filing for bankruptcy has gotten considerably more difficult since the enactment of the new bankruptcy law in mid-October 2005. Still, it continues to be a viable option for millions of individuals and businesses in the United States. Knowing your options can help you make the right decision for your business.

The type of bankruptcy you can file for depends on the type of business entity you own. If your business is a corporation, a limited liability company or a partnership, you're eligible to file for Chapter 7 or Chapter 11 bankruptcy. If you run a sole-proprietorship you must personally file for bankruptcy since there is no legal separation between you and your business. Therefore, you can file for Chapter 7, Chapter 11 or Chapter 13 bankruptcy. In all cases, a trustee is appointed to oversee the bankruptcy process to ensure it runs smoothly.

Chapter 7 Bankruptcy (available for corporations, LLCs, partnerships and sole proprietorships) - Chapter 7 bankruptcy is the option many sole proprietorships choose because it discharges most, if not all, of the business's debts. Formal corporations do not have their debts discharged - rather, all of the business assets are liquidated and the profits are paid to their creditors.

If you're a sole proprietorship considering filing for bankruptcy, you'll have to meet certain criteria according to the new bankruptcy law. First, you must make sure you fall within the monthly income restrictions. Each state has its own median income that will determine whether you can file for Chapter 7 bankruptcy. If your income is above the median, you'll take a means test to determine if your disposable income each month is sufficient for a Chapter 13 bankruptcy or low enough to allow you to file Chapter 7.

You'll also be required to attend mandatory credit counseling sessions prior to filing for bankruptcy and again before your debts will be discharged. Chapter 7 is likely your best bet if the business is wallowing in debt, has few or no assets and no prospects of a future.

Chapter 11 Bankruptcy (available for corporations, LLCs, partnerships and sole proprietorships) - If you file for Chapter 11, you'll work with a trustee on a reorganization plan that includes a repayment plan for creditors. Businesses in Chapter 11 repay their debts either in part or in whole as determined by the bankruptcy court. Generally, businesses in Chapter 11 are able to continue operations and will be closely supervised by the trustee and the court. Because filing for Chapter 11 is a long and expensive process most sole proprietorships opt for Chapter 7 (if eligible) or Chapter 13 instead.

Chapter 13 Bankruptcy (available for sole proprietorships) - If you aren't eligible or don't want to file for Chapter 7 bankruptcy you might decide on Chapter 13. To be eligible to file Chapter 13, you must not have secured debts of more than $922,975 and unsecured debts greater than $307,675. Working with a trustee, you'll devise a repayment plan to ensure you'll pay back in part or in whole your debt over an agreed period of time. If you file Chapter 13 note that it is possible for you to change your mind during the process and convert to Chapter 7.


In the end, filing for bankruptcy is a decision only you can make. You have numerous options and might want to discuss what is best for you and your business with a bankruptcy attorney.


Related Articles:

 

+   What you need to know about filing bankruptcy online
+   Information about filing for chapter 11 bankruptcy
+   How to choose a bankruptcy lawyer before filing for bankruptcy
+   Get information on bankruptcy trustees and their role in filings
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