There are two types of bankruptcy that can be used for a business: liquidations and reorganizations.
A liquidation bankruptcy is one which eliminates debt; often at the cost of liquidating (selling or transferring) your assets to creditors.
A reorganization bankruptcy can stretch out payments to creditors, reduce or eliminate some debts, and “reorganize” or rearrange your economic structure so you can keep your business.
The main liquidation bankruptcies are Chapter 7s and Chapter 11s. Chapter 7s liquidate the assets of the debtor to pay creditors (note that if there are no assets or only exempt assets, there may be nothing to liquidate). Thus, a chapter 7 filing for a corporation or LLC ends the business: it’s gone after the bankruptcy.
A Chapter 7 for an individual in business usually ends that business too. Under some circumstances it can survive, but usually without much of the property or assets it started with.
In a chapter 11, 12 or 13 bankruptcy, the goal is different: to save the business and protect the assets while dealing fairly with the creditors. Chapters 12 and 13 are only available for individuals (including a married couple) – not for corporations or LLCs.
Chapter 11s work for a structured business, like a corporation, or for a sole proprietorship. See Chapter 11 for Individual Debtors by Brett Weiss and Dan Press.
And Chapter 12s are only for a family farmer or fisherman.
But a Chapter 11 bankruptcy is expensive. For most consumers in a small business, Chapter 13 is a much less expensive way to proceed.
In any reorganization bankruptcy, the process generally involves categorizing the debts: determining which ones need to be paid, which ones can be reduced and which ones can be discharged.
The second step is to develop a plan to pay the necessary payments and leave enough money to continue the day-to-day expenses of running the company (payroll, rent, advertising, etc.).
Creating and maintaining a workable Chapter 13 plan for a business can be difficult and complicated.
But it can work, and a debtor in a Chapter 13 bankruptcy can often save his or her business.
image credit: Fried Dough
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Last modified: October 12, 2013