Three Types of Business Bankruptcy You Should Know About

When a small business fails, business owners face a challenging decision of whether or not to file for bankruptcy protection.

If you are in this position, it is important to understand the basics of bankruptcy,
as well as three types of bankruptcy options available to small business owners.

What is Bankruptcy?

Bankruptcy is a legal procedure conducted in federal court. The goal of bankruptcy is to help you repay or eliminate your debt with the protection and guidance of the court. At the end of the process, the court will decide which debts consumers or businesses can shed and which debts they need to continue to repay to creditors. Bankruptcy can offer some protections for a consumer or small business owner that make it advantageous.

It is wise to consult with an experienced bankruptcy attorney, however, before you begin the process. An experienced attorney will advise you about the pros and cons of each type of bankruptcy for your particular situation. The proper setup of your business will determine which type of bankruptcy is available to you.

Sole Proprietorships

A sole proprietorship is the simplest and most common small business type in the United States. A sole proprietorship is an unincorporated business run and owned by one person. There is no legal difference between the owner and the business. Sole proprietors can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is known as liquidation bankruptcy, and often applies when a business has no way to survive. This type of bankruptcy works well when a business’ debts are so significant that restructuring does not provide enough relief. Conversely, even if a business does not have substantial debts, if it lacks assets, it may be advisable to absolve the business under Chapter 7. In this type of bankruptcy, the court appoints a trustee who then distributes the assets among the creditors.

Chapter 11 Bankruptcy

If your business has a chance at surviving, Chapter 11 bankruptcy may be a better choice. In this legal process, the business will reorganize and continue operating. The court will appoint a trustee. The business files a plan detailing how it will reorganize debt and repay creditors. However, it should be noted that not all businesses in Chapter 11 Bankruptcy succeed.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is typically only available for personal consumers. That being said, sole proprietors can use this plan as well. Under the guidance of the bankruptcy court, you file a detailed plan stating how you will pay your creditors. The court will determine how much you need to pay back based on how much you owe, how much you earn and how much debt you or your small business has. One benefit of filing Chapter 13 for small business owners is that you may be able to keep your house if your personal and business assets are commingled.

Contact an Attorney Before Moving Forward

If you are considering filing bankruptcy, it is important that you reach out to an experienced North Carolina bankruptcy attorney to help you decide whether to file for bankruptcy and, if so, which type of bankruptcy is the most advantageous for you and your business. Don’t hesitate to reach out to us today Howard, Stallings, From, Atkins, Angell & Davis, P.A. for assistance.

When a small business fails, business owners face a challenging decision of whether or not to file for bankruptcy protection. If you are in this position, it is important to understand the basics of bankruptcy, as well as three types of bankruptcy options available to small business owners.

What is Bankruptcy?

Bankruptcy is a legal procedure conducted in federal court. The goal of bankruptcy is to help you repay or eliminate your debt with the protection and guidance of the court. At the end of the process, the court will decide which debts consumers or businesses can shed and which debts they need to continue to repay to creditors. Bankruptcy can offer some protections for a consumer or small business owner that make it advantageous.

It is wise to consult with an experienced bankruptcy attorney, however, before you begin the process. An experienced attorney will advise you about the pros and cons of each type of bankruptcy for your particular situation. The proper setup of your business will determine which type of bankruptcy is available to you.

Sole Proprietorships

A sole proprietorship is the simplest and most common small business type in the United States. A sole proprietorship is an unincorporated business run and owned by one person. There is no legal difference between the owner and the business. Sole proprietors can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is known as liquidation bankruptcy, and often applies when a business has no way to survive. This type of bankruptcy works well when a business’ debts are so significant that restructuring does not provide enough relief. Conversely, even if a business does not have substantial debts, if it lacks assets, it may be advisable to absolve the business under Chapter 7. In this type of bankruptcy, the court appoints a trustee who then distributes the assets among the creditors.

Chapter 11 Bankruptcy

If your business has a chance at surviving, Chapter 11 bankruptcy may be a better choice. In this legal process, the business will reorganize and continue operating. The court will appoint a trustee. The business files a plan detailing how it will reorganize debt and repay creditors. However, it should be noted that not all businesses in Chapter 11 Bankruptcy succeed.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is typically only available for personal consumers. That being said, sole proprietors can use this plan as well. Under the guidance of the bankruptcy court, you file a detailed plan stating how you will pay your creditors. The court will determine how much you need to pay back based on how much you owe, how much you earn and how much debt you or your small business has. One benefit of filing Chapter 13 for small business owners is that you may be able to keep your house if your personal and business assets are commingled.

Contact an Attorney Before Moving Forward

If you are considering filing bankruptcy, it is important that you reach out to an experienced North Carolina bankruptcy attorney to help you decide whether to file for bankruptcy and, if so, which type of bankruptcy is the most advantageous for you and your business. Don’t hesitate to reach out to us today Howard, Stallings, From, Atkins, Angell & Davis, P.A. for assistance.