Small and large businesses alike must sometimes file bankruptcy when debts become unmanageable. If you’re a small business owner and find yourself in this situation, we understand you’re worried about your future and there’s a lot you’re concerned about. The guidelines and rules surrounding business bankruptcies can be confusing for anyone to understand. Because of that, we’ve outlined the four most common types of business bankruptcies for you.
The Type of Business Dictates the Selection of Bankruptcy Chapter
Depending on whether your business is a sole proprietorship, partnership, or corporation will help to detail the type of business bankruptcy that you can file. Sole proprietorships are considered an extension of the business owner; therefore, the owner cannot file bankruptcy separate from his/her assets. By contrast, partnerships and corporations are considered business entities separate from the individuals running them, so filing bankruptcy that does not consider personal assets is allowed.
Chapter 7 Bankruptcy
These are often called liquidation bankruptcies. Studies show that Chapter 7 bankruptcies are the most common for both business and non-business cases. That’s partially due to the quick nature of these cases and the lesser amount of money it costs to prosecute them. Sole proprietorships can only file a Chapter 7 if it’s under the name of its owner. Partnerships and corporations who file a Chapter 7 bankruptcy do so with the end goal of total liquidation to pay off debts and creditors. After filing a Chapter 7 bankruptcy, the business entity will no longer be in existence.
The difference between individuals filing a Chapter 7 bankruptcy and companies doing so is that individuals get a “fresh start” when their debts are wiped clean. Business entities don’t receive this same “fresh start” because they will no longer exist.
Additionally, the bankruptcy court will appoint a trustee who oversees the preservation and liquidation of those assets. The trustee must issue payments to the creditors by a priority scheme outlined in the bankruptcy code with certain classes of creditors taking priority over others.
Chapter 13 Bankruptcy
This type of bankruptcy is only available to individuals and sole proprietorships – not to partnerships and corporations. The goal of a Chapter 13 bankruptcy is to reorganize one’s debt over a 3-5 year period. The debtor proposes a payment plan to pay back all debts, which must be approved in bankruptcy court. A Chapter 13 bankruptcy is a good option if you realistically have the means to pay back the debt in accordance with the timeline that’s been proposed along with the payment plan.
Chapter 12 Bankruptcy
As the newest form of bankruptcy, Chapter 12 went into effect in 1986 to help struggling farming and fishing operations. Chapter 12 is available for partnership and corporate entities, but the strict income and debt restrictions typically reserve it for farming and fishing businesses.
To qualify, farming businesses must owe 50% or more of their debt on direct farming operations. Fishing operations must meet a higher threshold, showing that 80% or more of their debt is on fishing operations. For both types of businesses, at least half of the overall income must come directly from farming or fishing operations.
Chapter 11 Bankruptcy
When most people refer to a “business bankruptcy,” they’re most often referring to Chapter 11. It’s used primarily in a business context, but it’s also available to individuals. Those individuals who might file a Chapter 11 bankruptcy do so, usually, to reorganize debt in the same way as with a Chapter 13 filing, but don’t want to be abiding by the type of strict payment structure.
In a Chapter 11 case, the bankruptcy court oversees the debtor, called the debtor-in-possession, as they reorganize their debts. The debtor-in-possession can continue doing business as usual as they figure out the debt restructuring details. The bankruptcy court will form a committee made up of the debtor’s 20 largest unsecured creditors. The committee supervises the case and embodies the interests of all the unsecured creditors. The debtor-in-possession aims to suggest and secure approval for a reorganization of the debt plan.
This type of bankruptcy is usually the most expensive and labor-intensive – which is why individual cases often avoid it. The debtor-in-possession must pay for the fees to form the creditor committee, as well as any lawyer or auditor’s administrative fees.
Trusted Northeastern Louisiana Bankruptcy Lawyers
If you’re contemplating different options for filing business bankruptcy, call the trusted and knowledgeable attorneys at E. Orum Young Law Offices. With more than 35 years of experience, they understand the complexities of filing for bankruptcy and can help ensure you’re on the best course to financial freedom. They’re proud to have filed more bankruptcy cases than any other law firm in Northeast Louisiana and can help you too. Call 318-450-3192 for a free case review or contact them online today.