To the average person, filing for bankruptcy, whether personal or part of your business, is an indicator of financial failure. However, this may be a bit of an oversimplification. According to Bradford Law Offices in Raleigh, filing for business bankruptcy becomes necessary when “the costs of a company’s debts are too much for the business’s resources to support. However, this does not have to mean the end of the business. In fact, in many cases, the restructuring that a company undergoes through business bankruptcy can actually leave it coming out stronger on the other end.” Making sure that your business is an example of this positive story requires planning.
What Is Business Bankruptcy?
The primary function of bankruptcy is to help your business eliminate or repay its debt under the protection of the bankruptcy court. Businesses failing is a constant reality, and in some cases, bankruptcy can soften the blow and allow you to be able to still make some moves afterwards. Businesses can apply for one of three types of business bankruptcy, and which you choose can determine whether or not your business is being reorganized or liquidated—an important distinction to make.
Chapter 7 bankruptcy may not be the type of bankruptcy that you hear about the most, but for many people, it is the ideal option. Generally, it is suited for when the debts of the business are so overwhelming that restructuring is not a viable option. In addition, it is suited well for businesses that don’t have any substantial assets. When this takes place, a trustee is appointed by a bankruptcy court to take possession of the assets of the business and distribute them among the creditors. Following this distribution process and payment for the trustee, the business receives a discharge, releasing the owner from an obligation to their debts.
Chapter 11 is generally reserved for larger corporations due to cost, but also gives you the greatest chance to continue on after bankruptcy. In this case, the business is reorganized under a trustee, who can sometimes be the owner. The company files a plan of reorganization outlining how it will deal with its creditors. Creditors will then vote on it, and a court will approve it if they find it fair and equitable. Get ready to wait, though, as it generally takes a year or more to confirm a plan.
Chapter 13 is rather unique, in that while it’s generally intended for consumers, you could turn it around for your business if you run a sole proprietorship. When you file, you provide a repayment plan with the bankruptcy court detailing how you are going to repay your debts. This would allow you to avoid losing personal assets that may be tied to your business.
Weighing Your Options
So, which of these three options are the best? This is a question without a single answer, as the nature of your business, as well as your goals, will determine what you should do. For example, small businesses are among the most likely to fail, but bankruptcy may not be the best option. In fact, if you have limited liability for your personal assets, the best recourse may be just to walk away than start bankruptcy proceedings. If you set things up as a corporation, LLC, or other limited-liability entity, this will help, but protection is not guaranteed. Sometimes, if you are truly personally liable for your debts, personal bankruptcy may be the way to go.
One thing that may also guide your hand is cost. We mentioned earlier that Chapter 7 was designed for businesses that planned on liquidating their assets rather than moving on, but it is also the least expensive of the three types of business bankruptcy, making it more attractive for small businesses. In addition, technically, there is the possibility for one to be able to start again after a Chapter 7. If no one bought your business assets when they were put up for sale, and the trustee was not interested, you can buy back your own assets in some cases. This is rare, but not impossible. The help of a good bankruptcy lawyer can often determine not just what type of bankruptcy is best for your business, but also the finer details of the filing process.
Sometimes, bankruptcy is the end, but it can also be the signal of a new beginning for your business’s operations. Be prudent and choose your options wisely, and your business could be well on the path to success once again.