What To Consider When You're Looking Into Bankruptcy For Your Business

There are plenty of reasons why a business fails, with most of them being beyond the grasp of an owner. If a company is failing misera...


There are plenty of reasons why a business fails, with most of them being beyond the grasp of an owner. If a company is failing miserably, most business owners consider bankruptcy as their only hope. But what should you do when you’re considering bankruptcy for your business? When is the right time to file bankruptcy for your business? What sort of legal actions you can take when filing for bankruptcy for your business? If you’re asking any of these questions, read on for some guidance. 

What is Bankruptcy?

Bankruptcy is a legal process that allows an individual or business to repay their creditors and get rid of their debts. Once you or your business is qualified for it, the bankruptcy law will protect you from your creditors throughout the bankruptcy process.

Most people misunderstand the meaning of bankruptcy. But in reality, bankruptcy is here to help people and businesses and give them a second chance to start over again. It’s a pretty good choice for businesses who are failing miserably.

When is the Right Time to File for Bankruptcy for your Business?

The best time for filing for bankruptcy for your business is when it is failing so much already, and your personal assets are starting to get affected. Bankruptcy is mostly applicable to businesses with a sole proprietorship.

In the case of a business with a sole proprietorship, you are the only owner of your company and you are also the only one liable for what happens to it. If your business fails, your personal assets are at risk from creditors and lenders. Of course, you would never want to lose your valued personal assets just because your business is going down. This is where bankruptcy fits right in. If you file for bankruptcy for your business, you shouldn’t lose any of your personal assets.

Which Type of Bankruptcy is Right for your Business?

If you think that filing for bankruptcy is the best option for your business, you should now choose which type is the right one. There are three main types of bankruptcy, and they are:
  • Business reorganization - Chapter 11 bankruptcy. This is suitable for larger types of businesses like corporations. It’s a type of business bankruptcy where a company can reorganize and continue to operate.

    The business will be reorganized under the jurisdiction of a trustee or a board of trustees appointed by the bankruptcy court. The trustee can also be the actual owner of the company. The company will then create a reorganization plan on how it can pay its debts and deal with the creditors. The creditors will then vote on the plan. The bankruptcy court will have to find out if the reorganization plan is fair and equitable before they can approve it.

    Reorganization plans may include payment terms to creditors that may run over a period of time, with some exceeding twenty years. Chapter 11 bankruptcies are complicated and most of the time don’t succeed. The process of filing a Chapter 11 bankruptcy can even take a year and is very costly.
  • Liquidation - Chapter 7 bankruptcy. Chapter 7 bankruptcy is suitable for businesses that are beyond saving or have no future. Everything is liquidated, and your business will be no longer able to operate.

    In Chapter 7 bankruptcy, the bankruptcy court will appoint a trustee to take possession of the assets of your business and then distribute them among your creditors. Once the assets are distributed, and the trustee is paid, you will receive a “discharge” at the end of the bankruptcy proceedings. A discharge means that you, as the owner of your business, is now free from any obligation for all the debts you incurred.
  • Personal bankruptcy - Chapter 13 bankruptcy. This is a type of bankruptcy where you can keep your business running while you get your finances straightened out.

    In Chapter 13 bankruptcy, you will submit a repayment plan to the bankruptcy court detailing how you intend to pay your creditors. You are allowed to keep your business running, but you’re going to spend most of your time repaying your debts until the agreed repayment term is fulfilled. Repayment terms usually last for 3-5 years and are typically determined by the amount of your debts, your income and the property you own.

    This is an excellent bankruptcy choice, especially if your personal assets are tied to your business assets. With Chapter 13 bankruptcy, sole proprietors don’t get to lose any of their personal assets versus filing for Chapter 7 bankruptcy. Also, your creditors won’t be bothering to collect from you throughout the repayment term.

Consult With a Bankruptcy Attorney First

Filing for bankruptcy for your business without the assistance of a bankruptcy lawyer is a risky thing to do. Bankruptcy procedures are very complicated and even the simplest mistake like forgetting to list an asset, filling out a form incorrectly, or missing a deadline for filing documents, is enough for your case to be dismissed by the bankruptcy court.

Consulting the services of a qualified bankruptcy attorney can help prevent you from making these mistakes though. They can help you figure out which legal actions to take and guide you through the complex procedure once you decide to file bankruptcy for your business.

If you’ve decided to file bankruptcy for your business, it’s important that you understand the bankruptcy process properly. And to do that, you need to seek the services of a qualified bankruptcy attorney. Yes, the law may not require you to have legal counsel on your side when filing for bankruptcy but trying to do it yourself is generally not a good idea.

The best way to file for bankruptcy is to do it with the help of a bankruptcy attorney. Talk with your attorney first if you want to understand what bankruptcy is all about. But you can't have just any bankruptcy attorney to help with your case; you have to pick your attorney carefully, because choosing the right bankruptcy attorney is essential to the success of your bankruptcy case.

Disclaimer:

The article above should not be taken as legal advice. The information stated above is only a general guideline on what to do when considering filing bankruptcy for a business. For better information regarding bankruptcy, you should consult a licensed bankruptcy attorney.


Author Bio:
Gerald Stevens has dedicated much of his life to law, and his pieces as a writer for Dove Law Firm are imbued with his wisdom obtained from over 20 years of experience in business. Gerald enjoys hanging out with his grandchildren when he has the free time.

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