Choosing to start a business always involves financial risks. While business owners may hope these risks pay off, occasionally debts may overwhelm the company and bankruptcy may become a necessary consideration.
Chapter 7 bankruptcy
Both businesses and individuals file Chapter 7 bankruptcy. Chapter 7 allows for the liquidation of your debts and assets. Choosing to file Chapter 7 will result in the closure of your company, and companies only suggest it when you cannot financially support your company any longer.
You should keep these facts in mind about Chapter 7:
- Most often filed by individuals and sole proprietors
- Secured debts may not be discharged
- Tax liens may not be discharged
- Assets will be sold to pay creditors
Chapter 11 bankruptcy
In Chapter 11 bankruptcy, you may continue to run your business. Chapter 11, known as “reorganization” bankruptcy, allows you to negotiate payments with your creditors. Chapter 11 bankruptcy requires you to come up with a repayment plan that the court must approve.
Under Chapter 11, businesses may do the following:
- Terminate leases or contracts
- Repay parts of their debt
- Discharge some unsecured debt
- Recover certain assets
Chapter 13 bankruptcy
Primarily, individual consumers file for Chapter 13. However, this type of bankruptcy offers many benefits to sole proprietors as well. To qualify, proprietors should own a small business and owe only to a few creditors.
Chapter 13 bankruptcy requires the following:
- Proprietors must meet the income requirements for both unsecured and secured debt.
- You may keep your assets.
- You must come up with a repayment plan for your credits.
- Plans typically must last no longer than five years.
Determining the right bankruptcy
You may not want to file for bankruptcy, and it can create a significant amount of stress. But if you decide it is the best option for your business, you will need to decide which type of bankruptcy best aligns with your long-term business and financial goals.