How Does a Company File for Bankruptcy?

Both individuals and businesses can file for bankruptcy. Filing for bankruptcy is a court proceeding wherein a judge and court trustee examine the assets and liabilities of an individual or a business who is no longer able to pay for bills. This will give the individual or business the chance to be discharged of debts. This means that they will no longer be legally required to pay for what they owe.

Bankruptcy laws are made to help people start over or have a second chance after having problems with their finances. Most of the time, both businesses and individuals that file for bankruptcy are discharged from having to pay their debts. This means that it’s important that when you’re planning on filing for bankruptcy, you have enough reason to do so.

Now, as a business, how does it really work? There are two types of bankruptcies that you can file for. First is Chapter 7 and both individuals and business entities can file for this. It’s the small business owners that have the option of filing for this on behalf of their business or themselves.

This could also mean that both your business and personal debts can be resolved by filing a Chapter 7 bankruptcy case. However, if you only file for bankruptcy on behalf of a business, it doesn’t help you get discharged from any debts.

This is mainly why business owners would just file for individual bankruptcy instead. This is shown very well in statistics as in 2015, the American Bankruptcy Institute or ABI found that 97% of the 844,495 bankruptcy cases in the US were filed by individuals. There were only 24,375 bankruptcy cases filed by businesses.

Now, as a business, what you really should know is that Chapter 7 won’t discharge you from any debts. You also can’t use any exemptions to protect assets in your business. What will happen is that the trustee will sell all of your business assets to pay the creditors. Definitely, this means that your business will be shut down.

For businesses that filed Chapter 7, it’s common that not all debts will be paid for. This means that whatever the gap is will still be shouldered by you. However, there are still chances that you’ll get better prices for the assets, so this means that your debt can be significantly lessened.

Now, the other bankruptcy case that only individuals can apply for is the Chapter 13 bankruptcy case. Indeed, only individuals can apply for a Chapter 13 case, but if you are a sole proprietor, you can also file for this to be able to reorganize your personal and business debts.

There are a few reasons why you may want or need to file for a Chapter 13 case rather than Chapter 7. Most commonly, this is because your income is too high to file for a Chapter 7 case.

Filing for Chapter 13 means that you can keep your assets and only pay a portion of your debts through a repayment plan. This could be a better option as it enables you to protect your business assets. This could mean that you can also keep the business running as you pay for what you still owe.

When it comes to how much you will be paying your creditors, this will be determined by your disposable income. To know how much it is, you only have to deduct your living expenses from your current income. Chapter 13 can let you pay for your remaining debts for up to 5 years.

Now, it’s important that you make payments in a timely manner when you have filed for a Chapter 13 case. This is because failure to make payments can allow the trustee to request for your case to be dismissed. Once this happens, you will have to pay your debt in full. This could also mean that you could lose the assets you’ve been trying to keep in the first place.

In some jurisdictions, to make sure that individuals who filed for Chapter 13 make payments on time, the employers are involved. This means that the employer automatically deducts your payment from your salary and submits what’s deducted to the trustee.

And so, you may get up to 5 years to be able to pay for your debts with Chapter 13 and it’s possible that unexpected things happen. There could be a change in your income or medical expenses that you didn’t really see happening. Don’t hesitate to ask your lawyer about this as a request for modifications of your payment plan can be approved by a trustee.