Business Bankruptcy Options Explained

There are two primary options for business bankruptcy: Chapter 7 and Chapter 13. Chapter 7 elections are common in both business and personal bankruptcy. They require the liquidation of assets in order to meet debt obligations. Chapter 13 elections are reserved for businesses. They allow a business to restructure debt based on a given income in order to stay in business and preserve assets. Each option will have specific benefits and risks to the business filing.

Benefits of Chapter 7

Chapter 7 bankruptcy completely removes any remaining debt obligations. Once the bankruptcy is closed, a business has no further obligation to the creditors. The creditors cannot contact the business during the bankruptcy process. They will only interact in the future if, for some reason, the borrower takes a separate loan from the same lender.

Risks of Chapter 7

Businesses do not get to elect which assets to keep and which to sell in order to resolve a Chapter 7 bankruptcy. A court makes all of these decisions for the business. As a result, the business owner is rendered very powerless in the process. If personal assets were placed as collateral for the business loans, the owner may lose these assets just as easily as business assets.

When to Elect Chapter 7

Chapter 7 bankruptcy is best for businesses that wish to dissolve instead of continuing their work. It is also best if personal assets are not at risk. Filing for Chapter 7 will dissolve the business, its assets and its remaining obligations. Most business owners report a great sense of relief by getting out of a failed venture with bankruptcy protection instead of continuing to pay debts for a business no longer in operation.

Benefits of Chapter 13

Chapter 13 bankruptcy allows a business to keep its assets and keep its doors open. The business has more control, even getting to submit plans to repay the debt. The trustee then evaluates the plans and negotiates with the lenders until a plan is approved that allows the debts to be paid and the business to continue operating.

Risks of Chapter 13

Many businesses try to file for Chapter 13 only to find they end up back in court with a Chapter 7 problem. It is a good idea to pursue Chapter 13 only if the business can be disciplined enough to actually make court-ordered payments at all cost. Further, the business will be prevented from taking new debts and engaging in other risky financial practices while the bankruptcy is handled. This can take years.

When to Elect Chapter 13

To elect Chapter 13, a business must have a solid revenue stream coming in the door each month. Chapter 13 will not even be an option for businesses without a predictable and large revenue stream. Chapter 13 is best for a business that has a viable plan for the future but has gotten into too much present debt. If a business can survive and meet debt obligations simply by restructuring, refinancing and budgeting costs, then the business has a lot to gain in electing Chapter 13 over Chapter 7.

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