Things You Should Know About Business Bankruptcy


The federal bankruptcy process allows individuals and businesses to eliminate or restructure their debt. No business wants to declare bankruptcy, so this is a last-resort option. However, it can also provide solutions to key financial challenges within a business, allowing the owners to keep the business and restructure it in a way that promotes future success. These are things you should know about business bankruptcy Columbia MD.

Chapter 7 Bankruptcy

If a business is a sole-proprietorship, corporation or partnership, it may file for Chapter 7 bankruptcy. Typically, if a business has so much debt that it cannot be restructured, the business has no viable future. In this case, Chapter 7 is the answer. This type of bankruptcy is called liquidation. It requires that the business owners liquidate all the business’s assets to pay its debts. Businesses without a lot of assets often choose this route.

Approval for Chapter 7 bankruptcy requires a means test. The courts review the business’s income, debts and assets. If the owner’s income is above a specific level, the bankruptcy will not be approved.

Chapter 11 Bankruptcy

Partnerships and corporations may apply for Chapter 11 bankruptcy if they can restructure and survive. However, sole-proprietorships whose owners have high incomes may also pursue this method. In this case, the courts appoint a trustee to oversee the business once it has been reorganized.

The reorganization plan details the company’s debts and how it will pay them. For example, companies may reduce their costs by terminating contracts while they increase their profitability by recovering assets. They may also discharge some of their debts and repay a portion of others. However, the creditors will vote on the plan to determine its fairness.

This type of bankruptcy is complicated and typically takes more than a year to complete.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is typically sought by individuals. However, sole proprietors can also file for this type of bankruptcy because their businesses are not distinguishable from their owners. If a small business does not want to liquidate its assets and go out of business, this type of bankruptcy is sought. For example, it allows these owners to restructure their businesses and create debt repayment plans. Then, the courts determine whether the plan is feasible and fair. Repayment of debts is dependent upon earnings, assets and amounts owed. This type of filing allows personal assets, such as homes, to be retained by the business owner.

If you are concerned about your business’s future because of overwhelming debt, contact a reputable bankruptcy attorney.

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