petition for bankruptcy

3 Different Types Of Business Bankruptcy

Not all types of bankruptcy are the same. When it comes to businesses, especially, there are differences between them that necessitate different forms of bankruptcy. So, when you do that search for a “bankruptcy lawyer near me,” you should probably know what those differences are beforehand so that you can talk shop with confidence and competence. This quick guide will help highlight how different types of business bankruptcy vary.

Why Do Businesses File For Bankruptcy?

First things first, you should probably know a bit of background on what bankruptcy is and why businesses choose to enter bankruptcy. Unfortunately, most small businesses don’t make it out of their first year in existence. Fewer still make it to five or ten years, so when it looks as if a business is reaching the end of its lifecycle, the option of bankruptcy must be considered. Bankruptcy help can take many forms, from simple advice on how to manage your finances to more complex legal assistance with filing for bankruptcy.

Bankruptcy is the process by which individuals and businesses can repay or eliminate their debts with the guidance of the court system. Now, there are three types of bankruptcy that businesses may elect to enter, depending on how they are structured:

  • Because sole proprietorships are legal extensions of their owner, said owner is responsible for all of the business’ assets. For this reason, sole proprietorships usually enter Chapter 13 bankruptcy, which is a reorganization bankruptcy that covers the adjustment of debts for individuals with regular income.
  • Businesses that are separate legal entities, like corporations and partnerships, will more typically file for Chapter 7 or Chapter 11 bankruptcy, which cover liquidation and business reorganization, respectively.

Next, let’s take a quick look at the basics on these three different kinds of bankruptcy.

Chapter 13 Bankruptcy

As alluded to previously, Chapter 13 bankruptcy is primarily for individuals, and closely associated with sole proprietorships because said proprietors are one with their business. Typically, the goal here is reorganization of the business, so Chapter 13 bankruptcy allows a sole proprietor to stay in business while repaying their debts. Specifics surrounding repayment are usually determined based upon how much you earn, how much you own, and the types of property and business assets in your possession.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves liquidation of a business, which is often the best course of action when the future of said business seems untenable. Such situations might include insurmountable debt, but it could also be a case where your business doesn’t really have any significant assets as well and, if you’re a sole proprietorship, your business is an extension of a skill you use or service you provide. Typically, with Chapter 7 bankruptcy, you’ll need to undergo a “means” test to determine your income level and see if you qualify. Afterwards, a trustee will be appointed to distribute assets to creditors and dissolve business assets.

Chapter 11 Bankruptcy

This form of bankruptcy is more suitable for businesses that may have a chance to turn things around, or if you’re a sole proprietorship whose income level disqualifies them from Chapter 13 bankruptcy. In Chapter 11 bankruptcy, your business will reorganize and carry on operations under the supervision of a court-appointed trustee. Reorganization will allow your business time to pay back what it owes, but is a complicated process that is not always successful.

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