When your business faces overwhelming debt, bankruptcy may provide the relief you need to either reorganize operations or close in an orderly manner. Business bankruptcy is a legal process that can help companies manage financial obligations while protecting against creditor actions.
Understanding business bankruptcy helps you make informed decisions about your company’s future.
1. Types of business bankruptcy available
There are several types of business bankruptcy:
Chapter 7 liquidation bankruptcy closes your business permanently and sells all assets to pay creditors. This option works best when your business cannot return to profitability.
Chapter 11 reorganization bankruptcy allows your business to continue operating while developing a repayment plan for creditors. This process lets you restructure debt and renegotiate contracts.
Chapter 13 bankruptcy applies to sole proprietorships and allows business owners to reorganize both personal and business debts over three to five years.
2. How business structure affects bankruptcy options
Your business structure determines which bankruptcy chapters you can file under and affects your liability.
Sole proprietorships and general partnerships make owners personally liable for business debts, meaning creditors can pursue personal assets.
Corporations and limited liability companies provide owners with protection from personal liability for business debts.
3. The bankruptcy process and automatic stay protection
Filing for bankruptcy immediately triggers an automatic stay that stops all creditor collection activities, foreclosures and repossessions. This protection gives your business breathing room to reorganize or liquidate without creditor harassment.
A bankruptcy trustee gets appointed to oversee your case and may take control of business assets depending on the chapter you file. You will participate in a meeting of creditors where you discuss your company’s financial situation with creditors and the trustee.
4. Reorganization plans and debt discharge
Chapter 11 bankruptcy requires developing a reorganization plan that shows how you’ll pay creditors over time while keeping your business operational. This plan must be approved by creditors and the court before being implemented.
Business bankruptcy involves complex legal requirements and can significantly impact your company’s future operations. Because of the different options available and their unique requirements, consider seeking legal guidance to determine the most appropriate bankruptcy chapter for your specific circumstances.