Business bankruptcy is a complex but sometimes necessary process. It allows struggling businesses to regain control after a difficult financial period, or it allows someone closing their company to limit personal liability for the company’s losses.
Regardless of whether you aspire to keep your business operating or expect to liquidate its assets, you need to make an informed decision about the type of bankruptcy you use. Choosing the right kind of bankruptcy will help protect you as an owner or executive or the company itself if you want to keep it open.
What are the three most common forms of business bankruptcy?
Chapter 7 or liquidation bankruptcy
When you want to get rid of the company’s debts as thoroughly and quickly as possible, Chapter 7 bankruptcy is probably the best option. There is a quick discharge if the company qualifies, and collection activity against the business will cease immediately when you file.
A Chapter 7 filing will typically require that you liquidate some company assets, which may make it a better choice for those closing a business than those trying to preserve the company. Chapter 7 bankruptcy can also work for a company that will massively downsize and try to rebuild from the basics.
Chapter 11 or restructuring bankruptcy
When a company wants to continue operating but needs to streamline its budget, Chapter 11 bankruptcy may be the right approach. Chapter 11 involves renegotiating certain debts and possibly laying off workers or closing some branches of the business.
By making aggressive budgetary cuts and creating a structured payment plan, the business may be able to preserve the company’s major assets and start turning a profit again eventually.
Chapter 13 or wage earner’s bankruptcy
When a business is a sole proprietorship, the owner may need to file for bankruptcy. A Chapter 13 bankruptcy or wage earner’s plan is a powerful tool for those who want to make payments on their debts and preserve assets.
Chapter 12 bankruptcies are another option if a person runs a fishing or agricultural business. Each of these forms of bankruptcy offers specific benefits and drawbacks, so learning more about the different options can help you choose the bankruptcy that will be most beneficial for you.