Bankruptcy Guide for Small Business Owners - Is Chapter 7, 11 or 13 the Right Option for You?
Bankruptcies can happen to companies of any size at any time. For a small business owner knowing your options ahead of time will make the bankruptcy process much less stressful and allow a more attainable recovery. Here is a summary of the benefits and disadvantages of Chapter 7, 11 and 13,
The benefitsLiquidation, or Chapter 7 bankruptcy, enables a sole proprietor to wipe out both personal and business debts. Filing for Chapter 7 bankruptcy may help struggling small business owners save their business or provide a simple way to liquidate it. This type of bankruptcy allows you to quickly discharge most debts and get a fresh, new start. You can receive a discharge typically between three and five months.
Chapter 11 bankruptcy is not usually used in small business bankruptcies because it is costly and complicated. However, if a limited liability company or partnership owns your business or if your business owes more than what*s required in a Chapter 13 bankruptcy, this might be your only option. Chapter 11 can be a good option because it allows you more time to negotiate with creditors and gives you time to work out affordable repayment plans. Your business can continue to operate, and this is the most significant benefit of Chapter 11. Generally, it can take from three to five years to carry out and get a discharge from Chapter 11. The filing of the Chapter 11 petition automatically stays all judgments, collection activities, foreclosures, and repossessions of property and may not be pursued by the creditors on any claim or debt which arose prior to the filing of the bankruptcy petition.
Chapter 13 bankruptcy is exclusively available to individuals and sole proprietorships and allows them to pay what they can afford, and to discharge debts they do not pay in full. Usually, it takes three to five years to get a discharge if you filed for Chapter13 bankruptcy. After that period, if you*re up-to-date with all your debts, the rest will be erased. Creditors have the right to seize your assets, such as your house or your car, in case you fall behind on your payments.
The disadvantagesWhile in Chapter 7 you will lose nonexempt property; the trustee can sell all nonexempt properties to pay your creditors. You could also lose some of your luxury possessions and all your credit cards. A Chapter 7 bankruptcy can remain on your credit report for up to ten years, and it will make it nearly impossible to get a mortgage.
As a small business owner, you may find Chapter 11 too costly to consider. Although you won*t need to sell your assets, you need to know that the filing fee is higher than in Chapter 7, and possibly the court costs are higher as well. If your business is trying to recuperate some of its money, Chapter 11 may not be your best option. The reorganization plan you develop must be feasible and approved by the bankruptcy court. Small businesses owners sometimes have difficulty finding a way to get their company out of debt. After your plan is confirmed, you will be paying off your old debts for years. For some business owners, Chapter 11 is considered as a lengthy and costly process.
Chapter 13 disadvantages are that you must make regular monthly payments to the trustee for quite a lengthy period, usually three to five years and you may have to pay back a portion of general unsecured debts. Chapter 13 bankruptcy doesn*t provide a total discharge of debt and remains on your credit report for seven years from the date of filing, so your ability to rent a house, buy a car, obtain a mortgage or engage in activities that require a credit check may be impacted.
It is a complex process - ask the help of a bankruptcy lawyerUnderstanding the advantages and disadvantages of filing for a Chapter 7, 11 or 13 bankruptcy can help you make an informed choice. Still, the best thing to do if you are considering bankruptcy is to contact an experienced attorney, with an excellent reputation, that specializes in business bankruptcy and reorganization, who can evaluate your case and find the most suitable solutions for you and your business.
Chapter 7, 11 and 13 bankruptcy are designed to keep small businesses running. If you feel like your business is drowning in debt, and you still want to stay afloat, these options can help you get back to a better place. Consulting an attorney who specializes in business bankruptcy is the first step.