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Which Types of Bankruptcy Repair Damage Caused by Business Failure?

Written by Wesley Scott | June 3, 2014 at 12:30 PM

There are several types of bankruptcy available to business owners who are struggling with overwhelming debt. Due to poor economic conditions, many businesses are forced to shut their doors. For some, the damage caused by business failure extends far beyond losing their business. In many small businesses, owners personally guarantee the debt incurred by the business. This means that, if the business fails, the creditors look to the co-debtor, or the owner, for repayment of the debt. Unfortunately, the closing of their business typically means the loss of the owner’s sole source of income, leaving no means to repay the business debts.

Bankruptcy can help relieve business debt and repair the damage caused by business failure. Because there are several types of bankruptcy individuals and businesses can file, there is almost always a solution that is right for each unique set of circumstances.

The Different Types of Bankruptcy for Business Debtors

Chapter 13 Bankruptcy – A Chapter 13 bankruptcy case can help a business owner, who is self-employed or owns a small business, reorganize and continue to operate; this type of bankruptcy case is not suited for large corporations. It can also help small business owners who are still struggling to pay the business debt that they remain personally liable for, even though their business has closed. The Chapter 13 plan can help reorganize that debt into a manageable monthly payment, much the same way it does for individual debtors. This will protect the owner’s personal assets from creditors seeking to recover monies owed by the business. An experienced bankruptcy attorney can evaluate your situation and advise if you are eligible and if a Chapter 13 case is your best solution for dealing with a business failure.

Chapter 7 Bankruptcy – A Chapter 7 bankruptcy is available for self-employed debtors, small business owners, corporations and partnerships. For self-employed or small business owners, a Chapter 7 case can wipe out the unsecured debt left behind when a business fails, which can be significant. In order to be eligible for this chapter you must meet the financial requirements of a Chapter 7 case; if you do meet financial requirements you may be able to discharge the business debt and begin recovering financially, from the loss of your business. Before filing a Chapter 7 bankruptcy, you should consult with an experienced bankruptcy attorney to determine whether or not your assets are at risk, or if they are covered by bankruptcy exemptions. A bankruptcy attorney can discuss the risks, if any, of filing a Chapter 7 case to help you decide if this is right for you.

For a corporation or large business, filing a Chapter 7 is a way to end the business. The assets of the business are sold by the Chapter 7 trustee and the proceeds are used to pay the debts of the business. The business typically ceases operations upon the filing of the bankruptcy petition, unless the trustee continues to operate the business to collect revenues until the assets are liquidated.

Chapter 11 Bankruptcy – This type of bankruptcy is what most people think of when they consider large corporate bankruptcy cases (i.e. automobile companies, large retailers, airlines, etc.), which is what it was designed for. A Chapter 11 bankruptcy case is similar to a Chapter 13 case, but on a much larger scale. The exception is that the debtor-in-possession (the title given to the debtor) continues to operate the business and remains in possession of business assets. The debtor-in-possession proposes a plan of reorganization for its creditors to consider so that it can have the debt relief necessary to continue operations. In some Chapter 11 cases, the company decides to close and use the Chapter 11 case to liquidate its assets and pay its creditors under the supervision of the court.

What Type of Bankruptcy Case is Best for You?

Deciding the answer to this question is a complex matter that greatly benefits from the advice and counsel of an experienced bankruptcy attorney. Because there are several types of bankruptcy that you may be qualified to file, you want to make sure that you choose the one that best fits your needs and protects your interests.

Request a free bankruptcy consultation to find an affordable solution to your business debt problems. With the help and support of an experienced bankruptcy attorney you can move past this financial crisis quickly and efficiently and get on with your life.