Many small businesses, and sometimes large businesses, consider bankruptcy if the business is struggling with debt.  Business bankruptcies operate very similarly to personal bankruptcies.  There are three options for a business bankruptcy, Chapter 7, Chapter 11, and Chapter 13.  Each have their own advantages and disadvantages.

Chapter 7 bankruptcy can be the most detrimental to a small business, but will be the most helpful to those in the worst situations. The business owners will have to prove to a judge they do not have assets to repay their debts and most liquid assets which do exist will have to be used to pay a portion of the debt.   Naturally this makes it hard for the business to continue operating to Chapter 7 bankruptcies will many times lead to a liquidation of the business.

For larger businesses, or those with higher amounts of debt and assets, Chapter 11 is the only available option.  It is also very expensive and complicated.  Chapter 11 bankruptcy will allow for a reorganization of the company so debts can be repaid without affecting any of the business’s assets or operations.  Kodak had sought Chapter 11 bankruptcy in January of 2012.

Smaller companies utilize Chapter 13 the most often.  There is no forced sale of assets in Chapter 13 bankruptcy but the business must demonstrate it has a sufficient income to be able to pay a portion of the total debt.  Owners of a sole proprietorship will have to track their income for six months before the bankruptcy to prove their earning capacity.  Under Chapter 13, a judge will create a business plan for the business to repay its debts within three to five years.

When deciding which Chapter for bankruptcy would be the best option, the owner(s) should take into account the size and structure of the business.  Corporations exist separately from its owners but partnerships and their owners are considered the same legal entity.  Seeking a business bankruptcy in a partnership can have serious impacts on the partner’s personal finances.

If you are considering declaring bankruptcy for your business you can contact Stone Law at 732-444-6303 or leave us a message on our website.