The harsh reality is that not all businesses are successful and may be forced into a small business bankruptcy filing. Financial failure can arise from a myriad of reasons. Bankruptcy, a heard in federal court is designed to assist such businesses to either eliminate or repay their debt while being protected by the bankruptcy Court. Business bankruptcies can either be a liquidation or a reorganization depending on the type of bankruptcy you file.

Bankruptcy law permits business owners to file three types of bankruptcy: Chapter 7, Chapter 11 and Chapter 13. The Chapter you may qualify for depends on the structure of the company.  Sole proprietorships are essentially legal extensions of the owner. The owner is personally liable for all assets and liabilities of the firm and is only allowed to file a Chapter 7 bankruptcy. Partnerships and corporations are viewed as legal entities in their entirety and can file a Chapter 7 or a Chapter 11.

Small Business Bankruptcy Filing: Chapter 7

Filing a Chapter 7 bankruptcy means that the business can no longer exist. A Chapter 7 bankruptcy will liquidate and sell the assets of the company. The proceeds are then used to pay off creditors.  Once the assets are sold and the trustee is paid, the sole proprietor receives a “discharge” at the end of the case. A discharge is the official order that releases the business owner from any legal obligation for the debt. Partnerships and corporations are not eligible to get a discharge.

Small Business Reorganization Filing: Chapter 11

Chapter 11 bankruptcy is better suited for those companies that are facing temporary hardship. When you file a Chapter 11 bankruptcy you have to prove to the Court that the company will regain profitability. This is indicating by filing a plan of reorganization outlining how it will deal with its creditors. Creditors have an opportunity vote on the plan. If the court finds the plan is reasonable, they will approve the plan.  Chapter 11 bankruptcies are substantially difficult and can last in excess of 20 years. Typically, it takes over a year for a plan to be confirmed. As such, it is recommended to seek out the services of an experienced bankruptcy lawyer. In many instances filing small business bankruptcy can be avoided. Speak to one of our experienced business debt relief lawyers during your free consultation to find more about: