What Happens When Your Business Declares Bankruptcy?


February 24, 2017

Bankruptcy is not a step that many business operators want to take. Unfortunately, it’s often the only option available when the owner wants to keep their company. There are several types of bankruptcy processes and very often, due to the complexities involved, a bankruptcy attorney is needed.

An attorney can evaluate your business’s debt circumstances and determine what legal options are best for a company before declaring bankruptcy. Rules are different among sole proprietorships, limited liability companies, and corporations. The following are general guidelines when considering which type of bankruptcy to file.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is effectively a discharge of unsecured debt. It’s also directly connected to the the business owner’s personal financial status. This is often the best choice for a business bankruptcy that is a sole proprietorship because the owner is required to assume the debt for the business when the funds are credited.

Chapter 7 also requires that the business owner file bankruptcy personally as well because the filer is entirely responsible for the debts of the business. The biggest disadvantage is that the bankruptcy trustee can seize and sell business assets as well as personal assets, and creditors can repossess any business assets that are listed as collateral for the debt.

Chapter 13 Bankruptcy

Sole proprietorship businesses cannot file Chapter 13 bankruptcy, but the owner-operator can file a personal Chapter 13 when they qualify. The same qualification standards that apply to a personal Chapter 13 bankruptcy will apply to their business also. Once again, both are the same entity.

The benefit of filing a Chapter 13 is that property and other assets can be kept in certain situations and the outstanding debts can be included in a long-term repayment program. These are usually five-year programs, but can be extended when the court is agreeable. This is a solid option for businesses that want to continue after bankruptcy and have a significant amount of assets. Business debts can still be consolidated with personal debt in Chapter 13.

Chapter 11 Bankruptcy

Chapter 11 is the designated business bankruptcy chapter. It works best for corporations and some limited liability companies. This is much more complicated that sole proprietorship business and usually much more expensive. The business can be qualified as a “small business creditor” debt filing if the debt amount is less than $2,450,925.

Chapter 11 personal bankruptcy is an option also, but there are specific significant restrictions on this chapter that usually result in the filer choosing Chapter 13. One of the most restrictive components of a Chapter 11 filing is that creditors can have input on whether the bankruptcy plan is acceptable or not, and many times this can be a real complication that your business lawyer Memphis TN trusts must iron out.

Bankruptcy proceedings can be complicated, and although a filer can apply directly for a bankruptcy, they always come out much better with the advice and legal expertise of a bankruptcy attorney who can evaluate the financial status of the business and advise on the best course of legal action.

Thanks to our friends and contributors from Wiseman Bray PLLC for their insight into business and bankruptcy practice.

Share this Article

About the Author