It is a reconciliation process where debtors get a chance to recover part of their unrecovered debts and borrowers can regain their financial credibility.
Depending on the type of bankruptcy filing, a business may continue operations with a plan to repay all or part of the existing debts.
US federal courts hear bankruptcy cases and appoint a trustee to handle business transactions afterward. The court decides the petitioner’s eligibility to file for bankruptcy and approves/denies a plan.
Types of Bankruptcies
Most businesses can choose either chapter 7 or chapter 11 bankruptcy. However, small businesses can file for chapter 13 as well.
It is also called straight bankruptcy. Most businesses are closed after filing for chapter 7 bankruptcy.
The federal court appoints a trustee to liquidate all assets of the business, consolidate and repay debtors in order. There is usually little left for business owners as a financial distress business does not own much anyway.
This type of bankruptcy is called reorganization. The appointed trustee works with creditors and the applicant to agree upon a reorganization plan for the business.
This plan helps a business continue operations while repaying debts with new terms. However, it is a costly and lengthy process and is commonly used by large businesses.
It is a similar type of bankruptcy to Chapter 11. However, it is used by individuals, sole proprietors, and self-employed only.
This type of bankruptcy also saves business owners from personal asset liens.
What Happens if Your Company Goes Bankrupt?
The outcome of a bankruptcy filing for your business depends on the type of bankruptcy filed. The choice of bankruptcy then depends on the entity structure as well as your future business plans.
A sole proprietor can file for all three types of bankruptcies with the following outcomes.
- Eliminates personal and business debts
- The trustee may sell all assets and close the business
- A bankruptcy means test is not required when business debt exceeds the personal debt
- Offers a reorganization plan to businesses and continues operations
- The filer can keep business and personal assets
- It is a costly and lengthy procedure and rarely used by sole proprietors.
- Owners can save personal property
- Businesses can continue operations
- It can be a costly plan if the debt repayment plan is shorter.
If your business type is a partnership, you can file for a Chapter 7 or Chapter 11. Chapter 13 is not available for business partnerships.
- If filed, the personal assets of partners can be liquidated.
- It may result in a partnership dispute due to increased litigation.
- A business is usually closed.
- Some partnership deeds prevent Chapter 11 bankruptcies.
- It helps a partnership continue business operations and construct a debt repayment plan.
LLC or Corporation
Chapter 13 is not available for LLCs and corporations either. So, their options are Chapter 7 or Chapter 11 for a company going bankrupt.
- There is no debt discharge for an LLC or a corporation.
- LLC members can lose personal assets pledged for loans.
- Corporations may face increased litigation and risk asset liquidation.
- Small businesses can file through an attorney representation only.
- It helps the business continue operations and construct a repayment plan.
Small business owners can file for joint personal and business bankruptcy as well. Also, they can choose to file for business bankruptcy as a business owner.
- It is suitable for small businesses that want to close business operations and protect personal assets.
- It protects personal assets and erases personal guarantees.
- The filer may have to take a bankruptcy means test.
- It is a costly plan for small business owners.
- It can offer a debt reorganization plan and help businesses continue operations.
- It helps a business continue operations.
- The trustee will include business valuation as unprotected assets.
- It can erase personal guarantees and protect personal assets pledged but the business debts must be repaid.