Most businesses don’t survive their first year on the market. Before they even realize it – or make any profit -, they are forced to file for bankruptcy and potentially lose all of their hard work and achievements.
However, business bankruptcy cannot be described via a single definition, as there are multiple types of business bankruptcy – each with its benefits and disadvantages for the business itself.
In the following lines, we’ll take a look at the three main types of business bankruptcy and at what they mean for entities that couldn’t resist the market!
Business Reorganization – Chapter 11
Bankruptcies are listed in the Bankruptcy Code of the US as chapters – chapter 11 is the first type. It is recommended for those entities that might be able to change their course of action in the future. How does it work?
This chapter comes in the form of a plan that implies the reorganization of the entity without shutting it down. It will continue to operate under a trustee appointed by the court itself.
Naturally, those in charge of the company must come up with a solid plan to escape debt and come out on top once again. Once the project is approved, it can be set in motion, and the business recovered.
The only downside is that Chapter 11 takes a lot to be approved due to its complexity – most of the time over a year.
Liquidation – Chapter 7
An alternative to Chapter 11 bankruptcy would be Chapter 7 – or liquidation. This type is ideal when those responsible for the business don’t think it will ever be able to survive. When there’s too much debt to take care of, and reorganization wouldn’t solve anything, the only answer is liquidation.
Keep in mind that liquidation will not be allowed if the business has an income over a pre-determined level – namely, income that could allow it to avoid liquidation and ensure survival.
Once liquidation is approved, assets will be distributed to creditors, the court’s trustee paid, and the business owner is free of any debt obligation incurred by the business itself.
Adjustment Of Debts For Individuals With Regular Income – Chapter 13
The last type is Chapter 13, which allows the management team of a business to continue its operations and try to repay the debts it has incurred, as opposed to the previous type, Chapter 7.
However, keep in mind that this chapter is ideal for small businesses only, especially for sole proprietorships. Given their size, reorganization and the attempt at survival are wiser than liquidation.
Basically, the court will recalculate how much you have to repay depending on various factors. If you’re eligible for this particular chapter, it is recommended to choose it in the favor of the previous one.
The Bottom Line
In short, Chapter 11 allows for business reorganization with the scope of repaying debts, Chapter 7 implies liquidation and the end of business operations, while Chapter 13 aims to help small business owners to save their business.
It is recommended to look into each type carefully, as they come with benefits that could change the way you look at business bankruptcy!