When starting a small business, many owners envision having long-term success and meeting their business goals. However, not all businesses succeed financially; many owners find themselves in situations where they must declare bankruptcy. Given that bankruptcy claims for a small business can be complicated, it is best to consult with an experienced attorney when deciding the financial future of the business.
A small business can file for bankruptcy using three different chapters of the US code: Chapter 7, 11, or 13. Each have their own provisions, rules, and outcomes. A Chapter 7 bankruptcy requires a limited liability company (LLC) or corporation to immediately cease all business operations. A trustee will then sell the assets of the business and allocate them to the necessary creditors. An important aspect of Chapter 7 is that the business’ debt is not erased. Therefore, a creditor can sue an individual from the business, which is quite risky.
The end-goal of bankruptcy chapters
A Chapter 11 bankruptcy is different from a Chapter 7 in that the business can continue to operate even after filing for bankruptcy. The end-goal of this Chapter is to create a plan, approved both by the court and the creditors, that adequately liquidates the business’ assets (or reorganizes them). The debtor in possession (the debtor in control) must answer all questions posed by the creditors and consult with them until a plan is reached to reorganize the assets.
A Chapter 13 bankruptcy for a small business means that the business maintains possession of property, but a trustee is still appointed (this is a major difference from Chapter 11). Under this Chapter, the owner can continue working, but must pay off all necessary debts according to a negotiated repayment plan. The payments are made to the trustee, who will then distribute to the creditors. The plan must not be voted for by the creditors, but rather be in accordance with the Code and approved by the court.
