Business Bankruptcy - Frequently Asked Questions

Do you happen to be a small business owner being strangled by mounting debts and limited cash flow? Are you no longer able to repay debts, including priority, secured and other types of debts? Have you come to a point that you are using the money from withheld taxes for business? If so, here are some business bankruptcy FAQ's that can help you understand what’s involved:

1. What are the different types of business bankruptcies?

Sole proprietorships, partnerships, LLCs and corporations can file for Chapter 7 or Chapter 11 bankruptcy. Chapter 7 is liquidation and it involves selling the business’s non-exempt assets and repaying creditors with the proceeds. The business ceases to exist after the bankruptcy process is complete. Chapter 11 is business reorganization. It gives a business more time to repay its debts. Businesses that see no point in continuing operations may seek protection under Chapter 7, while viable businesses can opt for Chapter 11 business bankruptcy.

2. What are the challenges of a business bankruptcy filing?

Sole proprietors have to file for bankruptcy in their individual name because the sole proprietorship business is an extension of the business owner. Partners run the risk of being sued by the case trustee in a Chapter 7 business bankruptcy in case the assets of the partnership firm are insufficient to repay its debts.

3. Chapter 7 or Chapter 11 business bankruptcy - which option should a business choose?

The business owner must understand that by reorganizing his business by seeking protection under Chapter 11, he cannot expect better market conditions. He must opt for this type of bankruptcy filing only when he is operating a business that can generate profits in the future given its current strengths. Chapter 11 business bankruptcy will help him free up some cash that can be used to run the day-to-day business operations. It will also help him reject expensive leases and prevent creditors from taking over his business assets.

4. What happens when a Chapter 11 bankruptcy process fails?

The court will convert it to a Chapter 22 bankruptcy, which is similar to a Chapter 7 bankruptcy. The business assets are sold and the business ceases to exist after the Chapter 22 bankruptcy process is complete.

5. What should the business owners pay attention to?

Before opting for Chapter 11 bankruptcy, the business owner must calculate his priority debts. If he cannot repay these debts, Chapter 11 business bankruptcy cannot help him. He must also check the extent of his secured debt. No secured creditor will reduce his debt because he can always take possession of the asset much to the dismay of the business owner. The business owner must make a list of his creditors and understand their classification and priority before choosing a business bankruptcy category.

These are some of the critical factors that all business owners must pay attention to before seeking protection under Chapter 7 or Chapter 11 business bankruptcy.