There are difficult decisions that must be made when a small business becomes inundated with debt. Choosing which bills to pay, which bills to put off, and which employees need to go is stressful. Before making any major decisions, it may be in your best interest to research Chapter 7 and Chapter 11 bankruptcies. Filing for bankruptcy may be your best option to eliminate debt and it may even help you keep your business going.
First, you must determine what type of bankruptcy fits your needs. If you are personally liable for the debts of your business, you may want to file a personal bankruptcy. This is ideal for businesses that are structured as a sole proprietorship or general partnership. Most small business owners who go this route tend to choose Chapter 7 or Chapter 13 bankruptcy, but Chapter 11 may prove useful as well.
If, however, your business is a corporation or LLC, you may want to file bankruptcy on behalf of the business. Chapter 7 and Chapter 11 are usually viable options.
- Chapter 7 business bankruptcy: Chapter 7 bankruptcy will eliminate most debt for which your business is liable. Once you file for Chapter 7 bankruptcy, an automatic stay will go into effect and collection agencies will have to stop contacting you. When a sole proprietor files for bankruptcy, the business debts are treated as personal debts and are discharged. When a corporation files for Chapter 7 bankruptcy, the assets will be liquidated and the trustees will have the burden of selling assets.
- Chapter 13 business bankruptcy: In a Chapter 13 bankruptcy, a business is able to reorganize debts and keep the business going. Instead of drowning in debts that must be paid right away, Chapter 13 allows a business to pay off debts over a three to five year period.
In general, if you want to pay off your debts and keep your business going, Chapter 13 bankruptcy is the way to go. If, however, you wish to eliminate all debts and walk away, Chapter 7 may be your best option. Make sure you explore all of your options before making any decisions. An Orange County bankruptcy attorney can help review your finances and debts to help you determine what option is best for you and your business.