Business bankruptcy is somewhat different from traditional personal bankruptcy.  Most people file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  These two bankruptcies are very different and have different outcomes and purposes.  Moreover, the two different types of bankruptcies have certain requirements. Some people may have the option to file one, and may not have the option to file the other.

What is “Business Bankruptcy?”

Chapter 11 bankruptcy is the form of bankruptcy that large businesses must use.  It is essentially the only choice large businesses or businesses with large amounts of debt and assets have when considering whether to file bankruptcy.  In a Chapter 11 bankruptcy, a business participates in a reorganization process, which allows debts to be repaid without the business operations being affected.

Chapter 11 bankruptcy gives the business the opportunity to continue operations while simultaneously revamping its relationship with debt and creditors.  It should be noted, however, that Chapter 11 bankruptcy is extremely time-consuming, complex, and costly.

What Options Do Small Businesses Have When Facing Bankruptcy?

There are 3 options for a business to file bankruptcy. The owner may decide to file a personal and business bankruptcy (Chapter 7) if they are a sole proprietorship, a personal or business reorganization (Chapter 13) or a large business or corporate entity reorganization (Chapter 11).

Chapter 7 bankruptcy can eliminate most or all the debts for which you are personally liable. This bankruptcy is the more traditional form of bankruptcy people think of when they hear the term. If you are a sole proprietor of your business,  you are personally liable for your business’s debts, and Chapter 7 may work well for you. A sole proprietor’s business debts are treated like personal debts.  Likewise, all  business assets are treated as your personal assets and must be listed  in the bankruptcy. It is important to make sure that you have enough exemptions  to protect all assets of the sole proprietorship.  Otherwise, the  bankruptcy trustee may be able to sell off all nonexempt assets which  can shut down your business.  California has specific  exemptions for equipment and tools of trade used in your business that  you can use to help protect these assets through a small business bankruptcy chapter 7.

A small business bankruptcy Chapter 13 occurs where a court helps the debtor restructure their obligations while continuing business.  Creditors are paid from the available funds/proceeds through a restructuring Plan of Reorganization. Chapter 13 bankruptcy is an option for small businesses, but cannot be used by businesses that are owned through partnership or corporations.  Moreover, there are certain debt limits when one chooses to file Chapter 13 bankruptcy.  Filing for Chapter 13 bankruptcy can also allow some or all debt (depending on the type of debt) to be completely wiped away. Chapter 13 proceedings are complicated and typically require attorney help, although it is possible to file an emergency Chapter 13 on your own and get help from an attorney shortly afterwards.

Chapter 11 bankruptcy, as described above, is also available to a small business considering whether to file for bankruptcy.  Generally, small businesses and large businesses are required to follow the same rules when applying for protection under Chapter 11 bankruptcy.  However, there are some rules that differ.  For example, Chapter 11 bankruptcy generally requires that a creditors committee be appointed to oversee and represent the interests of unsecured creditors; if you are a small business filing Chapter 11 though, a court can see to it that no committee is created.  Moreover, small businesses are given a deadline to complete the organization process, which is generally not a requirement in Chapter 11 bankruptcy. Chapter 11 proceedings are extremely complicated and would need full attorney representation.

Do-It-Yourself Small Business Bankruptcy Chapter 7

If you are considering filing for a small business bankruptcy Chapter 7 in California and want to avoid the high cost of attorney’s fees, you may be able to prepare your own bankruptcy documentation. Keep in mind that if your business is a corporation, you will need to hire an attorney to represent the corporation.

As of January, 2017, A People’s Choice no longer offers bankruptcy document preparation services.