Your small business can fail for many reasons, and you may be faced with the decision of filing for bankruptcy protection. Between March 2018 and March 2019, over 22,000 business owners filed for business bankruptcy.
Just like individuals, businesses can file for bankruptcy. The guidelines for Bankruptcy are vary depending on the type of entity and the chapter under which the entity is filing, so it’s important to know what type you will file.
PCS Debt Relief will touch on the four most common types of bankruptcy:
Chapter 7 Bankruptcy
Chapter 7 is also called straight bankruptcy or liquidation bankruptcy. If you choose to file, then all business debt assets will be immediately liquidated. It is typically used when the debts of your business are so overwhelming that restructuring it is not feasible.
When you file for Chapter 7, a trustee is appointed to take charge of the business. The trustee will begin the process of liquidating all assets. Once they have recovered and liquidated all assets, then the creditors are able to file claims with the court requesting payment. The assets will then be divided between the creditors, allowing also for trustee fees and costs. After the assets have been distributed and the trustee is paid, a sole proprietor receives a “discharge” at the end of the case.
A discharge means that you are released from any more obligation for the debts. Partnerships and corporations do not receive a discharge.
Chapter 11 Bankruptcy
Chapter 11 was designed to allow your struggling business time to restructure in order to create success. It is a plan where your company can reorganize and continue operating under a court-appointed trustee.
You will need to negotiate a reorganization plan with creditors, which will typically provide them partial payment. Creditors can file a competing plan if they believe your proposed plan is not in their best interest.
Reorganization plans provide more payments to creditors over a period of time which may exceed twenty years. Chapter 11 bankruptcies are exceedingly complex and many don’t succeed. If you decide to file, it usually takes over a year just to confirm a plan.
Chapter 11 is your best option if you are behind on debt payments but still have some assets and regular income.
Chapter 13 Bankruptcy
While your business is not technically allowed to file for Chapter 13 bankruptcy, you can file for yourself and cover expenses you may personally owe due to the failed business. When you file Chapter 13, any corporate stock or partnership interest owned by you is nothing more than an asset. The bankruptcy will not directly affect the asset.
The amount you have to repay depends on how much money you earn, how much money you owe, and how much property you own. If your personal assets are involved with your business assets, you can avoid problems such as losing your house.
In order to file, you must be able to show a steady income as a means for meeting some of the debt owed over a 3 to 5-year period. At the end of the period, and in the terms agreed upon in court, additional unpaid debt will be discharged.
Chapter 13 is a great option if you are overloaded with debt or have personal assets at risk due to the failing business.
Chapter 12 is the newest form of bankruptcy. It closely mirrors Chapter 13, except that it applies specifically to family farms and fishing operations. It was created to allow the family to stay in the business of farming while reorganizing and paying off previous debts.
To qualify for Chapter 12, you must owe at least 50 percent your debt on farming or fishing operations. It is the desired option over other bankruptcy options because it takes into account the unpredictability and seasonal nature of agriculture.
If you need help putting together a budget and making a long-term financial plan, PCS Debt Relief can help with our debt relief services that are tailored to your needs. We understand the burdens and stress that debt creates, and we’re here to help you every step of the way. Call (636) 209-4481 for a free consultation to achieve financial stability.