Business Bankruptcy: Chapter 7, 11 And 13 Blog
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Filing for bankruptcy protects a business owner’s personal assets when their business fails or unable to pay debts. When going through financial hardship, this action may prove to be entirely appropriate. However, before filing, you must consider why you should file first. Is your business in growth or in decline? If declining, will you be able to regain your business’ competitive standing? If you decide instead to reorganize, do you have enough revenue and other assets that will let you continue? In cases like this, it’s best that you look for a financial tax advisor that will help you review your business standing.
After evaluating your business with your financial tax advisor, the next step is to decide what type of bankruptcy you will file. Below are the three main types of bankruptcy that you can file for your business. These are named as “chapters†according to where they are in the Bankruptcy Code of the US.
Chapter 7: Liquidation
When you’ve evaluated that your business may have no feasible future, filing the Chapter 7 bankruptcy is your option. Known as the “liquidationâ€, this type of bankruptcy is for businesses with overwhelming debts that even restructuring them will still not work. This can be used by sole proprietors, partnerships, as well as corporations. Another situation that Chapter 7 may be used is when there are no substantial assets that remain in the business.
During the process of Chapter 7 bankruptcy, there is an approval stage. Here, the applicant will go through a “means†test. This is to check if their income passes a certain level; otherwise, the application may not be approved. However, when approved, the business will be officially dissolved.
In the bankruptcy court, a trustee will be appointed. They are charged to take possession of the remaining assets and distribute them accordingly to the creditors. After the distribution, sole proprietors will be given a “discharge†where they are officially released from any debt obligations. However, this does not apply to partnerships and corporations.
Chapter 11: Business Reorganization
Chapter 11 is ideal for businesses evaluated as having a chance to regain their competitive standing in the market. This is also usually for partnerships and corporations. Here, the company will plan how they will go through a reorganization and continue their operation under trustees appointed by the court. Basically, ways on how they will pay their creditors over time. They will also outline here on how they will handle their creditors. Contract and leases will be terminated, assets recovered, and a portion of their debts will be repaid while discharging a few to regain profitability. These plans will be presented to the court, and when they find it fair and equitable, the plan will be approved.
Chapter 13: Personal Bankruptcy
This is reserved for sole proprietors. When small businesses would instead opt for reorganization than liquidation, Chapter 13 bankruptcy is the solution. Sole proprietors will file a repayment plan, presenting to the bankruptcy court on how they will repay their debts. The repayment amounts also depend on the owner’s income, debt, and assets.
It’s important to note here that Chapter 13 bankruptcy lets business operations continue while Chapter 7 does not. Also, Chapter 13 lets you avoid losing your personal assets as they are connected to your business assets, unlike Chapter 7.
There are also instances where sole proprietors have income levels too high to qualify for Chapter 13. In this case, they will have to file for Chapter 11 instead.
As mentioned, hiring a financial tax advisor will help you determine if bankruptcy is the best answer to your problems. Certified Public Accounting Firms such as ours at Prestige Accounting Solutions in Atlanta offer pre-bankruptcy counselling. Here, we will thoroughly review your options with you. Learn more here.