Business

What to Consider When You’re Looking Into Bankruptcy for Your Business

Embarking on a journey into the world of business is like a rollercoaster ride. Most days you’ll have your ups, but some days you’ll have your downs too. In any one of your down moments in business, you may have turned to borrowing money for you to continue pursuing your endeavor.

However, if you still haven’t paid back some of the money that you borrowed despite already exhausting all efforts to fulfill your obligation as a debtor; you might want to declare your business bankrupt instead. But before filing for it in court, listed below are some of the things for you to consider when you’re looking into bankruptcy for your business:

Looking Into Bankruptcy for Your Business

1) Three of the most common types of bankruptcy available at your disposal

If you’re considering to declare your business bankrupt as a final solution, here are three of the most common types of bankruptcy that you can use:

  • Chapter 13 wherein you have to come up with a detailed plan on how you’ll repay your creditors and file it in a bankruptcy court.
  • Chapter 11 wherein you have to reorganize your financial obligation to your creditors.
  • Chapter 7 wherein your business becomes liquidated, thus putting an end to it.

2) If your business is a sole proprietorship, you can file for either Chapter 13 or Chapter 11 bankruptcy so that you can continue running it

You might balk at the idea of shutting your business down, especially if you’ve put so much work into making it stay afloat amidst factors that might have led to its slow descent into bankruptcy. The good news is that you can declare your business as bankrupt without closing shop at all.

  • Declaring your business bankrupt under Chapter 13 protects your assets from seizure and subsequent sale.
  • However, filing for Chapter 13 comes with two sets of debt limits: one for secured debts like that loan you’ve taken out to lease commercial space, and the other for unsecured debts like when you used your business credit card to purchase some office equipment.
  • As Chapter 13’s debt limits are adjusted every three years in April; you would want to ensure that the money you owe your creditor is less than the current year’s secured or unsecured debt limits.
  • You can also consider filing for Chapter 11 instead of Chapter 13. However, as there’s no legal distinction at all between you and your business under a sole proprietorship setup, you might be forced to sell your assets once you declare Chapter 11. Thus, you should use Chapter 11 with caution.

3) On the other hand, you can file for Chapter 11 bankruptcy if your business is legally operating as either a partnership or corporation

Compared to if you’re running your business as a sole proprietorship, setting it up as either a partnership or corporation can help you reap the benefits that declaring it bankrupt under Chapter 11 has to offer.

  • Unlike Chapter 13, Chapter 11 doesn’t have any debt limits at all. Thus, corporations looking for a way out of their massive debts often resort to using Chapter 11 instead.
  • Chapter 11 allows you to restructure your business debt by way of a reorganization plan wherein you have to indicate how much money you plan to give back to a certain creditor of yours and when do you plan on giving it to them.
  • The only problem with declaring Chapter 11 for your business though is that all the creditors who you owe money from would have to agree to your reorganization plan, and the bankruptcy court where you filed it would then have to approve it.

4) But if you want to shut your business down, you can file for Chapter 7 bankruptcy instead

When there’s no other choice left for you but to close shop so that you can repay the debt that you owe your creditors, you can declare your business bankrupt under Chapter 7.

Chapter 7 bankruptcy

  • Your business as a sole proprietorship can benefit from filing for Chapter 7 as it gets rid of your business and personal debts. However, most of your assets would be seized and sold under Chapter 7 with the money coming out of the sale itself used as repayment of your debt to your creditors. To know which of your assets you can keep, you would want to check your state’s bankruptcy exemptions.
  • If your business has been set up as either a partnership or corporation, filing for Chapter 7 doesn’t guarantee at all that your debts would get wiped clean even after most of your assets have been seized and sold. Thus, you should still figure out how you can pay your creditors back even after declaring Chapter 7 for your business.

Most – if not all – businesses have borrowed money at one point from people or institutions. However, some of them might find it easy to pay back the money that they borrowed, especially if they’re turning a profit for the most part. Your business, on the other hand, might have suffered from too many losses that you’re unable to pay all your creditors the money that you owe them. Thus, you would want to look into a bankruptcy lawyer and  read the above-listed items for you to consider when you’re looking into bankruptcy for your business so that you can re-assess if it’s the way to go for you.

Monika Hall is a businesswoman and has been a law writer for the past 12 years. She is currently writing a new law piece and hopes to impart her knowledge to others in her writing. Monika is forever a creative spirit. She always expresses herself with creative pieces such as poetry whenever she has the time.

About the author

Harshil Barot

Harshil is the founder of Tech Motus. Working as an SEO Expert, started blogging recently on soul idea of sharing. Being fond of computers, mobiles and gadgets from childhood, would love to share my ideas and knowledge about ever evolving technology.

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