Filing for business bankruptcy is never in a small business owner’s plans. Open starting a business, most have high hopes and grand plans that they will be successful, both financially and regarding their public image. Even if the latter is strong, sometimes financial failure happens. When it does, many business owners are faced with the choice of whether to file for bankruptcy or not.
Bankruptcy in any sense is a legal process taken to repay debts to other entities under legal protection by the courts. It is an organized plan, executed under legal supervision and with approval by all involved creditors, debtors and legal professionals. In the world of business, a bankruptcy is often referred to as either a liquidation or a reorganization, depending on which type of bankruptcy is chosen.
The three types of bankruptcy most commonly used in business are chapter seven, chapter eleven and chapter thirteen bankruptcy. Let’s take a closer look at each, and how they affect the future of the business filing for them.
Typically, when a business chooses chapter seven business bankruptcy, it is because the business has failed and will no longer be financially capable of continuing as it is. While some businesses file for this type of bankruptcy and then go on to be reorganized, turned over to new ownership or management and reopened, this is usually a final move by the business owner or proprietor in closing up shop. For this reason, this type of business is usually referred to as liquidation.
When the debt accrued by a business are so substantial that there is no possibility of restructuring them in a manageable way, chapter seven is usually the right choice. Additionally, chapter seven bankruptcy may be chosen if a business does not possess any meaningful assets with which repayment of debt could be made.
During chapter seven bankruptcy, the owner or proprietor of the business hands over their debt and all assets that are associated with the business to a trustee, much the way personal bankruptcy is handled. After all debts have been settled or repaid, the business and its owner is given a discharge, absolving them of that debt permanently. Once this discharge has been given, that person or entity is then free to begin a new business, though they may experience difficulty in doing so for a variety of reasons.
Chapter eleven business bankruptcy offers a brighter outlook for businesses that may yet have a future. This type of bankruptcy is commonly chosen by companies that are still salvageable. It is oftentimes referred to as a reorganization, because the company’s debts are reorganized into a manageable repayment plan and the company continues to operate. Chapter eleven bankruptcies can be incredibly complex in the world of business, as they take a great deal of time to complete. Creating the initial plan may take over a year, while paying off the debt to the creditors may take more than twenty. For this reason, creditors involved in the case are allowed to vote on the plan, and decide if it is fair and equitable. Because their answer may be a negative one, this type of bankruptcy is famously risky for businesses, but can be well worth that risk, should the plan be accepted.
This type of bankruptcy is usually reserved for individual consumers, but it can be used for businesses that are considered sole proprietorships. The entire point of this type of bankruptcy is making a manageable repayment plan for your debts. This plan will be dependent on your income or earnings, what you own as part of the business and more.
This type of bankruptcy can be risky if your personal assets and earnings are associated with your business, but it can be a much better option than filing chapter seven bankruptcy. It is always advisable to consult a legal professional when contemplating bankruptcy of any kind for both counsel and recommendations on preparing your paperwork.
In addition to consulting with a bankruptcy attorney or similar counsel before deciding on a type of bankruptcy to file, you may also want to ask if bankruptcy is really the best option for you at all. Because of state and federal government protections and other available programs, your business may have more options than you are aware of.
When you are in the midst of the bankruptcy process, it can seem as if there is no light at the end of the tunnel. However, modern day America is made up of comeback success stories, many of which have a chapter of bankruptcy somewhere in their biography.
Research shows that many small businesses that file bankruptcy actually rebound in some shape or form and become thriving versions of what they once were. This may be a matter of luck or timing in some cases, but in many, it’s simply a matter of learning from past mistakes and making a better way forward.
Your individual comeback story may be one of starting over, especially if you filed for chapter seven bankruptcy. If your previous business no longer exists, you can start anew with the things you learned from the previous failure in mind. After all, failure is a key element in future success!
If you filed either chapter eleven or chapter thirteen bankruptcy, your previous business may still be in operation. If this is the case, be sure to apply what you’ve learned from your previous debts and the bankruptcy experience to the way you run things, moving forward.
Regardless of which type of bankruptcy you filed, there are a few important steps to take when starting fresh in your business. Begin by planning for the next five years. Talk to a financial planning specialist. Work on repairing your credit. Negotiate new contracts and deals with vendors, contributors and sponsors, and make new contacts within your industry. Before long, the thought of your bankruptcy will be one of a distant past that no longer holds you and your business back from the things you want to do. Keep moving forward, and remember – no matter what kind of bankruptcy you or your business has to file, it’s only one chapter in your story.