There are a lot of different types of business bankruptcies. Unique factors affect each and can make certain ones better for your business than others.
Here is what you need to know about business bankruptcies and how they can affect your company.
One of the most common cases in a bankruptcy court is Chapter 7 bankruptcy. This type allows sole proprietors to turn over all of their business and personal assets for liquidation and wipe their debt. The court divides the funds from your liquidation among your creditors. During this process, the court stops creditors from taking collection actions. However, the process can not discharge all debts, such as tax obligations.
The most significant benefit of Chapter 7 bankruptcy is that it discharges all eligible debt, and you can keep your state-protected assets. The biggest drawback is that you will lose a lot of property, and your credit score will be negatively affected.
Chapter 11 bankruptcy allows a business to restructure its debt to repay creditors over an extended period and remain in operation. Once filed, your company becomes a “debtor-in-possession.” You will receive a temporary period where your creditors cannot take collection actions. Your payments will begin again after you create a repayment plan that your creditors and the bankruptcy judge approve.
Family fishing and farming businesses can use Chapter 12. It is a type of reorganization but allows for a periodic repayment plan to allow for the seasonality of these businesses. The payment plans are typically created for up to five years.
Ideally, you will not encounter any of these types of bankruptcies. However, if you find your business in considerable debt, consider these options and which one is the best fit for you.