While a lot of attention in being placed on individuals and their financial problems, small businesses are also struggling. When a small business reaches a stage where mounting debt is making the business unviable, filing a petition for bankruptcy may appear as the only solution. For many businesses, the problem is in deciding which Chapter is right for them.
Small businesses can petition for bankruptcy using one of three Chapters depending on the structure of the business. The Chapters you can consider are:
Chapter 7 – all businesses can file for Chapter 7 bankruptcy if the debts far outweigh the assets and there is no future for the business. Under Chapter 7, the business is wound up, the assets sold, and the proceeds distributed amongst the creditors. Sole traders are treated as individuals in this process and, once completed, are discharged. Partnerships and corporations are not discharged; they are generally dissolved.
Chapter 11 – as with the Chapter 7, all business models can file for bankruptcy under a Chapter 11. This allows a business to restructure and attempt to trade their way out of trouble. A repayment plan is established (that can last up to 20 years) and the creditors paid off as the business continues to trade. Generally speaking, unless there is a real change in business fortunes, a Chapter 11 will fail and need to revert to a Chapter 7.
Chapter 13 - a Chapter 13 petition for bankruptcy can only be filed by consumers or, in the case of small businesses, by a sole trader. Like the Chapter 11, the process involves setting a repayment plan before the court that demonstrates the business’s ability to repay creditors over a period of time, normally three to five years. Chapter 13 filings for small businesses are treated in exactly the same manner as they are for individuals.
Bankruptcy is a serious issue for small businesses, and comes with a lot of legal complexities, especially if employees are involved. You should really seek the advice of a bankruptcy attorney before commencing any action. They will be able to advise which Chapter is most suited to your circumstances.
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