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Types of business bankruptcy

On Behalf of | Mar 26, 2021 | Blog, Business Bankruptcy |

Running a business, whether large or small, means taking risks, including not being able to pay debts. Bankruptcy gives Ohio small businesses a legal way out of certain debts that they see no way of paying. However, many owners may wonder what type of bankruptcy they should file, and if they can remain open.

Chapter 7

Chapter 7 bankruptcy makes up 80% of the cases for consumer filings, and it may be the best option for sole proprietors who do not see a future. The owner has to list their non-exempt assets in the bankruptcy petition for liquidation and selling. Exempt assets commonly include vehicles with too little equity, essential clothing and furniture, and essential business tools.

The trustee divides money from the sale of assets among the creditors to pay some or all of the debt. Corporations, partnerships and LLCs that sign guarantees may still get their assets sold. It is rare for a business to remain in operation, but there could be exceptions that the trustee has to approve.

Chapter 13 and Chapter 11

Chapter 13 is primarily designed for sole proprietorships and individuals who desire to pay debts or they don’t meet the qualifications for Chapter 7. Chapter 13 gives business owners time to pay debt through a court-approved plan the owner creates based on their income. The plan commonly gives debtors three to five years to satisfy debts.

Many partnerships file under Chapter 11, if restructuring is realistic. Some sole proprietorships file Chapter 11 if their income exceeds Chapter 13 limits. Unlike Chapter 7, Chapter 13 and Chapter 11 don’t require selling assets, and the business can commonly remain open under the guidance of the court trustee.

Sometimes, events happen that make bankruptcy necessary to file, but it could impact credit scores. For this reason, a debtor should seek advice from an attorney.


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