Entrepreneurs understand the risk of starting a business. They know the chances they are taking, and that the odds are stacked against them. Roughly 20% of all new small businesses maintained operations for more than a year between 2005 and 2017. Then half of that tally or 10% lasted for five years. Only about 7% of the start-ups survived at least 10 years.
In scenarios of failed businesses, bankruptcy often is a solution. In all, three types of business bankruptcy exist: Chapter 7, Chapter 11 and Chapter 13. Only in the former route is liquidation on the table. Chapter 7 is a viable option for a business that really has no future. Chapter 11 and Chapter 13 represent reorganization bankruptcies in which businesses work with lenders and creditors and get a second chance on life, emerging in efforts to succeed.
If you expect to survive, reorganization is the option
Here is a breakdown of the types of business bankruptcy along with brief descriptions:
- Chapter 7: Also referred to as liquidation, Chapter 7 is really the only choice for a business that has little or no chance of survival. Businesses pursue this route due to overwhelming debt, conceding that a Chapter 11 reorganization is not possible. Partnerships, corporations and sole proprietorships with few significant assets rely on this type of business bankruptcy. The business dissolves, and the bankruptcy court appoints a trustee to take control of any assets and distribute them to creditors. Once that is complete, a sole proprietor is released from any further debt obligation. However, corporations and partnerships do not receive such a discharge.
- Chapter 11: For businesses that have a more realistic chance of survival, Chapter 11 is the way to go. Corporations and partnerships often choose this type of business bankruptcy, which is complicated. Under Chapter 11, companies reorganize and continue to operate under the supervision of a court-appointed attorney. The company assembles a thorough plan on working with creditors, while also terminating contracts and recovering debt in an effort to become profitable again. The bankruptcy court must approve the plan.
- Chapter 13: Individuals typically resort to this type of bankruptcy to reorganize debt. However, sole proprietorship businesses can pursue bankruptcy via this route, too, and avoid liquidation. This route allows you to keep your business in operation while paying off debts. Chapter 7 does not allow you to do this.
When you have concerns about your business’s survival, bankruptcy is an option. Businesses that expect to survive should pursue the Chapter 11 and Chapter 13 routes. But if you know that your business has little chance of survival, you should seek a Chapter 7 liquidation bankruptcy.
