While it's true that business bankruptcies are not necessarily the greatest experience in the world, they are a necessary evil to help the owners and officers of a failing company find relief when they are out of options. Bankruptcy can provide for liquidation of a company, reorganization, and a workable plan to satisfy as many creditors as possible. To that end, business owners have many different business bankruptcy options when it comes to choosing the form of their bankruptcy protection. In fact, there are six options according to federal law.
Business bankruptcy options usually take the form of one of the four following filings:
Chapter 7 liquidation can be used by sole proprietors as well as corporations, partnerships, and LLC's. In simplest terms all non-exempt assets are surrendered to the court for liquidation. Once liquidation is complete, and the money disbursed among creditors, that should be the end of it in most cases. Keep in mind however, that for a sole proprietorship filing under Chapter 7, the business owner's personal assets are subject to the bankruptcy proceedings. If there are any non-dischargeable debts involved, such as tax liens or alimony and child support, the business owner will still be liable for them even after liquidation is complete.
When a corporation, partnership, or LLC decides to file under Chapter 7 company officers need to be prepared to potentially put in quite a bit of time in the process. While some company liquidations can be accomplished very quickly, sometimes it takes a number of years to sell off all company assets. In that time the owners and officers must still keep their books, file their taxes, and be sure not to incur any more debt. Though rare, there have been cases of some Chapter 7 liquidations that have gone on unresolved for years.
Unless a business is facing a monumentally serious problem, Chapter 11 is the most common way to go. With a Chapter 11 filing the company is allowed to remain in business and is free to maintain day-to-day operations as they see fit. The only time the court intervenes is in approving a reorganization plan and approving or rejecting any major expenditure that the business must undertake during the reorganization.
Chapter 11 reorganization is not available for sole proprietorships because they have nothing to reorganize in the same sense as a corporation, LLC, or partnership. Where those other three types of businesses are considered separate legal entities from their owners, a sole proprietor ship is not. If a sole proprietor wants the ability to reorganize rather than liquidate he would file under Chapter 13.
A Chapter 13 organization is very similar to Chapter 11, in that it allows for the sole proprietor to continue maintaining ownership of his personal assets, continue the day-to-day operations of the business, and work out a repayment plan with his creditors. Chapter 13 is probably one of the best business bankruptcy options for sole proprietors due to the fact that they stand to lose so much if they choose a Chapter 7 liquidation. And just as Chapter 11 is not normally used by sole proprietors, Chapter 13 is normally not used for corporations, partnerships, and LLC's.
Under Chapter 13 the sole proprietor will present to the court a plan to pay off creditors and emerge from bankruptcy. If the court finds the plan suitable it will most likely approve the plan without intervention. However, sometimes a court may intervene and reduce some of the indebtedness if it can be demonstrated that creditors are assessing unnecessarily burdensome fees and interest rates.
Family farms and fishing operations have one the most unique business bankruptcy options available exclusively to them. The reason for developing a special chapter for these types of businesses lies in the nature of their financial standing. Many times these businesses are passed down from one generation to the next with no clear delineation ownership and share. The complicated nature of family farms and fishing operations requires some special rules.
Without getting into the details of all those rules, a simple explanation for Chapter 12 is to say it is very similar to chapters 11 and 13 in that it is a reorganization plan. Under this business bankruptcy option, individuals who are materially responsible for the family farm or fishing operation will submit to the bankruptcy court a plan that will achieve full payment of debt within 3 to 5 years. If the court approves the plan creditors must cease and desist full collection activities for all debts covered under the agreement. As long as the family-owned business remains faithful to the court-approved plan everything goes well.
What we've given you here is a basic overview of the four most common options available to small businesses considering bankruptcy. There are certainly many more details we have not covered in this article, but you can find further information on specific bankruptcy laws and options throughout this website. Suffice it to say that if you need to avail yourself of one of these business bankruptcy options, you obviously need some help; and possibly some relief.