Businesses typically have three options for filing bankruptcy. Specifically, 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). All of these bankruptcies have different outcomes, purposes, and requirements. Moreover, some people may have the option to file one, and may not have the option to file the others.
Three Types of Bankruptcy for Businesses
When most people think of the term “bankruptcy”, they think of Chapter 7. Chapter 7 bankruptcy can eliminate most or all the debts for which you are personally liable. For example, if you are a sole proprietor of your business, you are personally liable for your business’s debts. Therefore, Chapter 7 may work well for you.
When filing Chapter 7, you must list all business assets as your personal assets. As a result, it is important to make sure that you have enough exemptions to protect all assets of the sole proprietorship. California has specific exemptions for equipment and tools of trade used in business that you can use to help protect these assets. Otherwise, the bankruptcy trustee may be able to sell off all nonexempt assets, which can shut down your business.
A small business Chapter 13 bankruptcy occurs when the court helps a debtor restructure their obligations while continuing business. Further, the business pays creditors from the available funds through a restructuring plan of reorganization. While Chapter 13 bankruptcy is an option for small businesses, it cannot be used by businesses that are owned through partnerships or corporations.
There are certain debt limits to filing Chapter 13 bankruptcy. That said, Chapter 13 bankruptcy can actually eliminate some or all debt. While it is possible to file an emergency Chapter 13 on your own, proceedings are complicated and typically require an attorney’s help.
In Chapter 11 bankruptcy, a business participates in a reorganization process. This allows the company to repay debts without affecting the business operations while simultaneously revamping its relationship with debt and creditors.
Large businesses must use Chapter 11. Generally, small and large businesses must follow the same rules when applying for protection under Chapter 11 bankruptcy. However, some rules differ. For example, Chapter 11 bankruptcy generally requires appointing a creditors’ committee to oversee and represent the interests of the unsecured creditor. That said, the court can help with creating a committee for small businesses. Further, small businesses are given a deadline to complete the organization process, which is generally not a requirement in Chapter 11 bankruptcy. Note that Chapter 11 proceedings are extremely complicated and will require full attorney representation.
As of January, 2017, A People’s Choice no longer offers bankruptcy document preparation services.