Legal Considerations When You Have to Apply for Business Bankruptcy

Disclaimer: The information presented below lists some general considerations that you should remember when you have to apply for business bankruptcy and isn’t in any way legal advice. To know what you have to consider when you want to declare your business as bankrupt from a legal perspective, you should consult a licensed attorney specializing in business bankruptcy law as soon as you can.

Business Bankruptcy

Running a business isn’t without its fair share of risks. But one business risk that you may find difficult to climb out of is incurring massive debt. Regardless of the exact reason as to why you suddenly found yourself having to deal with debt that you still owe your creditors to this day, thoughts of declaring your business as bankrupt may have already crossed your mind, especially if you’ve already exhausted all other debt repayment options available at your disposal.

For you to pull it off without any hassle, here are some of the legal considerations that you should take note when you have to apply for business bankruptcy:

  1. You can choose from any one among the three most common types of bankruptcy used by most businesses who also want to get themselves rid of their debts.

When you strongly believe that declaring your business as bankrupt can save it from sinking deeper in debt and the bankruptcy attorney that you’ll be hiring for your business agrees with you, here are the three most common types of bankruptcy that you can use:

  • Chapter 13 in which you’re supposed to develop a plan on how you can repay some or even all of your business debts
  • Chapter 11 in which you plan to restructure your debt so that your business can carry on per usual
  • Chapter 7 in which you have to say goodbye to your business
  1. When you’re running your business as a sole proprietorship, it’s best to file for Chapter 13 bankruptcy instead.

Applying for business bankruptcy doesn’t necessarily mean that you have to shut your business down as you can still leave it operational by declaring it under either Chapter 13 or Chapter 11 if it’s a sole proprietorship.

  • Chapter 13 bankruptcy has two sets of debt limits, one for secured and the other for unsecured. Your secured debts are those backed by collateral like that commercial space you leased for your business, while your unsecured debts are those not tied to any asset like that purchase you made using your business credit card.
  • Chapter 13’s debt limits are subject to change every three years in April, so you might want to make sure that your outstanding secured and unsecured debts are below their respective limits no matter the year when your business incurred them.
  • You can also consider filing for Chapter 11 instead of Chapter 13. However, your bankruptcy lawyer would most likely talk you out of declaring Chapter 11 as you might have to sell your assets should you push through with it since a sole proprietorship setup doesn’t provide any legal distinction at all between you and your business.
  1. Meanwhile, if your business is either a partnership or corporation, you can file for Chapter 11 bankruptcy.

Chapter 11 might do you more than harm than good if you’ll be using it for your business that you’re running as a sole proprietorship. However, the reverse is true if you’ve added some partners to co-manage your business or allowed a board of directors to guide it.

  • Compared to Chapter 13, you don’t have any debt limits to consider when you declare your business as bankrupt under Chapter 11 which is why it’s the preferred type of bankruptcy by most corporations.
  • Chapter 11 bankruptcy also lets you draft a reorganization plan wherein you’re supposed to detail there how much of your debt are you willing to give back to your creditor as well as your preferred repayment schedule.
  • However, your creditor would have to agree first with your proposed reorganization plan, and the court where you filed Chapter 11 should also approve it for your business bankruptcy to take effect.

Chapter 11 bankruptcy

  1. If you don’t want to run your business anymore, you can declare it as bankrupt under Chapter 7.

The stress that comes with trying to get out of your huge business debt might already be taking a toll on you. You may then have decided to close your business and file for Chapter 7 bankruptcy.

  • For your business that’s a sole proprietorship, applying for Chapter 7 is the fastest way to eliminate your debts. However, most of your assets would be seized and sold with the money from their sale to be used as debt repayment to your creditor. To find out which of your assets aren’t allowed by the law to be seized and sold, you should consult your state’s bankruptcy exemptions.
  • On the other hand, your debts wouldn’t get wiped clean if you’ve used Chapter 7 for your business that’s set up as either a partnership or corporation. You should, therefore, continue exploring other ways on how you can repay your debts even after filing for Chapter 7.

As much as you may have initially made it a point not to borrow money from anyone, you may have eventually been forced to break that promise to yourself, especially if there are urgent needs in your business. If you’ve been consistently turning a profit, you may find it easy enough to repay your creditors. However, if you’ve been losing money too frequently and suffering from a huge amount of debt, you would want to read the above-listed legal considerations when you have to apply for business bankruptcy so that you can evaluate further if it’s the right option for you to take.

If you’re seeking for additional information on you can apply for business bankruptcy, checking this website might be of great help to you.

This article is contributed by Monika Hall. She is a businesswoman and has been a law writer for the past 12 years. She is currently writing a new law piece and hopes to impart her knowledge to others in her writing. Monika is forever a creative spirit. She always expresses herself with creative pieces such as poetry whenever she has the time.

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