No business owner looks forward to filing for bankruptcy, so most don’t know the ins and outs of how to file. Unfortunately, this last resort has become the best option for many businesses in today’s trying economic times. The first step to take is to learn about options, so read on to find out what business owners need to know about the types of business bankruptcy to get started.
There Are Three Types of Bankruptcy Designed for Businesses
Business owners can file for Chapter 7, Chapter 13, or Chapter 11 bankruptcy. The last of these options is typically reserved for those companies with especially complex financial situations, so most small business owners are left with the choice of filing for either Chapter 7 or Chapter 13. The vast majority of them choose Chapter 7 bankruptcy. Call this law attorney to get help with the filing process.
Chapter 7 Is a Liquidation Bankruptcy
Chapter 7 bankruptcies are liquidation bankruptcies, which means that they are designed for those who want to close up shop for good. All non-exempt assets will be sold, and eligible debts will be discharged. The business will no longer be able to operate after filing for Chapter 7 bankruptcy, so don’t plan to get back to business as usual once the debts have been discharged.
Who Qualifies for Chapter 7 Bankruptcy?
There are strict requirements that debtors must satisfy to qualify for Chapter 7 bankruptcy. The most obvious of them is an income requirement. Businesses whose income has fallen below the state’s median for the preceding six months are usually eligible for filing, but some exceptions apply. If, for example, the courts find evidence of fraud, a business may be ineligible to file for bankruptcy even if it passes the means test.
Chapter 13 Bankruptcy Allows Businesses to Continue Operating
Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in that it does not require the full liquidation of the business. Instead, business owners can create a plan to reorganize debts while retaining ownership of necessary business equipment. Business owners may need to liquidate some of their assets and renegotiate some of their debts. If their reorganization plans are approved and they abide by the terms of them, some debts will eventually be discharged.
Qualifying for Chapter 13 Bankruptcy
Chapter 13 bankruptcy is only an option for sole proprietors and is applied to consumer and business debt alike. As with Chapter 7 bankruptcy, Chapter 13 bankruptcy filers must pass a means test, meaning that their income must fall below a certain threshold. Applicants must be current in their tax filings and must be able to demonstrate that they have the means to pay down debts after restructuring and selling off unneeded assets.
What About Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is designed with corporations in mind. Like Chapter 13, it allows them to restructure their debts and assets according to a reorganization plan. This is the most expensive type of bankruptcy, so business owners should only file for Chapter 11 if they have already explored all their other options and have found that they are not viable.
Final Thoughts
More businesses than ever are considering filing for bankruptcy. Many are left with no other choice as the pandemic continues to affect local, national, and global economies and force stores, restaurants, and other service providers to close their doors either temporarily or for good. The best thing for those who are seriously considering filing for bankruptcy to do is to consult a bankruptcy lawyer who can help.
