Years ago, bankruptcy was considered a very touchy topic. Today, people are more aware of the concept, especially of Chapter 11 bankruptcy, which is mere reorganization of business. Bankruptcy can occur when a business finds itself under serious financial stress mainly because of its loans. The interest that it needs to pay on the loans eats away into the company’s profits and cash reserves and the company finds itself cash-strapped.
There are various business bankruptcy options available to a firm, but it must choose the right option after thinking through all the implications. It is also important that the company appoints an attorney who is an expert in the appropriate bankruptcy laws that are applicable to the company. It is also not necessary that bankruptcy is the only alternative available; an experienced attorney can place numerous business bankruptcy options and other options before the firm.
With that said, here are the various business bankruptcy options available to a small business which is financially distressed:
1. Chapter 7 – Liquidation. When businesses observe that there is no longer a chance for the business to become profitable because the product line was unsuccessful or confronted with insurmountable debts, then seeking for a Chapter 7 bankruptcy protection would be ideal. Chapter 7 is mainly for small businesses and sole proprietorships, where the business is linked to the individual business owners. In Chapter 7 bankruptcy, the assets of the business are sold off and the creditors are repaid with the proceeds. After the proceedings are over, the company ceases to exist.
2. Chapter 11 – Reorganization. This is preferred by companies with potentials but are hounded by debts. This Chapter allows the company to sort out its affairs and get more time to repay its debts. The company needs to submit a reorganization plan together with its petition for bankruptcy, which must be accepted by its creditors. If majority of the creditors approve, then the company has to execute the plan as per its terms. When the creditors are paid and the plan has been executed fully, then the debts of the company are eliminated.
3. Chapter 13 is another one of the several business bankruptcy options for sole proprietors who are earning wages. This is called a wage earner’s bankruptcy since it is meant for sole proprietors who got his personal and business assets combined together, thereby enabling him to pay off debts using his wages. This Chapter will help protect the personal assets of sole proprietors.
4. Farmer businessmen and fishermen who have a consistent income can seek protection from loan providers under Chapter 12 bankruptcy.
So, to sum up, these are the business bankruptcy options available. Businesses have to take into account whether it would need liquidation or mere reorganization, look into secured debts, tally all their assets, and take time to ponder upon whether or not to hire a business bankruptcy lawyer to handle bankruptcy filing.
A bankruptcy proceeding could make sense for many business owners. However, when business debt has grown to become overwhelming, there are alternative options. Business debt consolidation or debt management may be able to help a business get out of debt without filing chapter 11 business bankruptcy.
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