Bankruptcy for Business Owners

Small Business Bankruptcy vs. Corporate Bankruptcy

Small businesses, whether they are sole proprietorships, general partnerships, corporations, or limited liability companies (LLCs), have choices when exploring bankruptcy. 

• Chapter 7: This is the most appropriate option for an enterprise that does not have a future in business.

Both individuals and businesses can qualify for relief under Chapter 7 bankruptcy. A sole proprietor can discharge many debts, including credit card balances, medical bills, lease obligations, utility bills, and even some loans.

If you are the sole proprietorship owner of a small business, you may file Chapter 7 on behalf of your enterprise or for yourself. The most important thing to remember is that In most cases, your business will be permanently shut down.

Filing a bankruptcy petition under Chapter 7 will stop most collection agencies from knocking on your door. But the protection you receive under the petition is usually effective for a relatively short period of time.

If your business is a corporation or limited liability company, Chapter 7 bankruptcy provides you with a path to liquidate your company and its assets.

In both situations, when you file Chapter 7 a bankruptcy trustee is assigned by the court to evaluate your assets. This trustee is responsible for selling off the properties of the business and paying creditors who have submitted claims against the company. 

• Chapter 11: This category of bankruptcy is beneficial when your business is generating some income, but not enough to cover all your expenses. Chapter 11 allows your company to reorganize while continuing to run and conduct business. It can be the best choice if you have a good chance of rebuilding your company.

Under Chapter 11, a repayment plan must be approved by the court. Also, a Chapter 11 bankruptcy application can be a complicated and lengthy process. Consulting a qualified bankruptcy lawyer would be beneficial in understanding the process.

• Chapter 13: This bankruptcy chapter is used for small businesses when reorganizing is the objective. Under Chapter 13, you can continue to run your business while repaying creditors without giving up your assets.

 It is only available for sole proprietors and individuals. Chapter 13 is not available for partnerships, corporations, or LLCs. Be aware that there are limits on the amount of secured and unsecured debt in this category. 

• Chapter 12. Created in 2005, this category covers farmers or fishermen facing financial difficulties. It is limited to this very small niche of the population and accounts for a very small percent of the total bankruptcies filed in the U.S.