Business bankruptcy is a legal state, in which a business finds itself unable to repay its debts to its creditors. In such a situation, the business owner might resort to file business bankruptcy (this is called voluntary business bankruptcy filing) or the creditors might move to retrieve their due (involuntary bankruptcy filing).
Filing business bankruptcy can be an emotionally difficult process for any business owner. However, sometimes things can go wrong for a business either due to wrong decisions or due to external/unforeseen conditions; and in such a situation, filing for business bankruptcy might become the best option (of the available options). Generally, your creditors would be prohibited from collecting their dues from you while your bankruptcy case is on.
Types of business bankruptcy
There are three types of business bankruptcy based on the Chapter under which you file business bankruptcy. Also, the applicability of each type of business bankruptcy depends on the type of business i.e. sole proprietorship, partnership, Limited Liability Company (LLC) or corporation. In case of sole proprietorship, the personal assets of the proprietor might be sold in order to retrieve the money for repayment of the business debt. However, in case of LLCs, corporations and some partnerships, the assets of the business owners are protected since the business is treated as an entity separate from the individual/individuals that own the business.
So, the three types of business bankruptcy (applicable to individuals too) are:
Chapter 7 bankruptcy
Under Chapter 7 (which is applicable primarily to individuals and small businesses i.e. sole proprietorships), the assets of the business and the business owner/proprietor are liquidated in order to make the repayments to the creditors… as per the bankruptcy law. Post this exercise, the business/proprietor is free of debt. Chapter 7 is opted for by business owners when they see no future for the business and decide to give-up rather than fight it out and repay debts.
Chapter 13 bankruptcy
Under Chapter 13 bankruptcy (this too is applicable to individuals and small businesses or sole proprietors), the debt is reorganized in such a way so as to facilitate the repayment over a three to five year period.
Typically, the court will appoint a trustee who will set-up a repayment plan (might ask the debtor to prepare the plan) based on the debt, the income and the assets of the business/proprietor. This plan is then shared with the creditors and edited till there is an agreement achieved between the debtor and creditors. If required, the trustee will intervene to help finalize the repayment plan between two parties.
So, Chapter 13 offers more protection to personal assets (e.g. home) as compared to Chapter 7 bankruptcy.
Chapter 11 bankruptcy
Under Chapter 11 bankruptcy, the business gets more flexibility in terms of repayment period which can extend even up to twenty years or more. However, the business is kept under a very close scrutiny at all times. Like the other two Chapters, Chapter 11 too covers individuals as well. Chapter 11 bankruptcy is quite complex and the processing time is also much more for Chapter 11 Bankruptcy.
Though Chapter 7, 13 and 11 are the most commonly discussed Bankruptcy Chapters, there is another one (Chapter 12) under which fishermen and family farmers can file business bankruptcy.
It is also important to note that there are various eligibility criteria that you must fulfill for each type of bankruptcy and hence it might not totally be your choice. In any case, it would be best for you to consult a bankruptcy attorney to help you out in taking the decision and moving your case forward with ease.