As members of a capitalist society, Americans live within the shadow of financial status. Sometimes the pressure to compete with neighbors and coworkers as well as others who are “living the American dream” causes rational folks to live beyond their means. Unfortunately, the trend has also affected business owners, though not to the same extent.
In the past, business owners would lose their business and end up in debtor’s prison for failing to pay their debts. However, times have changed and businesses are now afforded the opportunity to declare bankruptcy and ultimately “start over.” While only 3% of the bankruptcy filings in 2012 involved a business, this number is based on a bankruptcy count of over 1.5 million cases.
Types Of Business Bankruptcy Filings
There are three popularly filed types of bankruptcy, those are Chapter 7, 11, and 13. There are three other types, 9, 12, and 15 that are narrow in focus and are rarely used in today’s financial arena. Chapter 11 is a type of bankruptcy intended for larger companies that wish to stay in business during the filing process. It allows company owners to negotiate with creditors regarding repayment options and timelines to repay while allowing companies to reorganize their business structure.
Chapter 7 bankruptcy accounts for the majority of individual filings, with 70% of the yearly cases. However, it is also the preferred route for business owners who see no future in their company. This plan is also known as liquidation and involves the sale of any company assets that can be sold. The money from the assets is distributed to creditors. In many cases, there are not enough assets to sell and the Chapter 7 filing is just an acknowledgment that the business is being dissolved.
Chapter 13 bankruptcy is a reorganization of your debts in such a way that you are able to pay many of them off. It is generally reserved for individual consumers, although sole proprietors can take this route to avoid losing their home or other property in the event that their personal and business assets are mixed together.
Can Bankruptcy Be Filed On Everything?
Although debtors enjoy the advantage of filing bankruptcy on many of their debts, bankruptcy is not the catch-all opportunity some business owners believe it to be. There will always be some debts that remain as non-dischargeable debts for business owners. These debts include:
- Taxes withheld from payroll checks
- Debts the business incurs after filing bankruptcy
- Loans that go towards a pension plan
- Criminal penalties and restitution
What Is The Process Of Filing Bankruptcy?
When you’ve decided as a business owner that you can no longer handle your company’s debts, you should seek out the counsel of a quality bankruptcy law firm. Your attorney will spell out the options available to you and the cost of each with regards to filing for bankruptcy. Additionally, the future financial impact of declaring bankruptcy over making arrangements to pay your debts off needs to be discussed. You will need to bring all of your company financial records with you, including income statements, prior tax filings and a record of assets to discuss the best type of bankruptcy to file.
Once you have decided on the path you wish to take, you will start the filing process. This process involves filling the paperwork out and providing your attorney with a list of creditors to be notified of your bankruptcy. Once the attorney shares your status with creditors they are no longer allowed to contact you regarding repayment. Depending on the type of bankruptcy you have chosen, you will either hand the company over to a trustee to restructure and reorganize your debts or you will wait for a court decree that signals the end of the process.
Bankruptcy should be the last resort for those who have inadvertently gotten themselves so far in debt that they see no way out. Used appropriately, bankruptcy can save a business owner from losing personal property to business debt and permanently damaging their financial future.