What Happens When a Business Has to File for Bankruptcy

When it comes to the future of your business, filing for bankruptcy might seem like the absolute worst thing that could happen. And, yes, it will show up on your credit report, which might put you at risk of getting rejected by certain long-term lenders. However, filing for bankruptcy is not necessarily a death sentence—in fact, it could mean the difference between sinking or saving your business.

Let’s review the different types of bankruptcy, and what happens when your business has to file Chapter 11.

Small Business Bankruptcy Filing Options

Small businesses have three basic options for filing for bankruptcy: Chapter 7, Chapter 13, and Chapter 11. The bankruptcy option you qualify for depends on both your plans for your business as well as your business’ ownership structure.

• Chapter 7: This is an option if you do not have a means to keep your business running, even with a restructure. Your creditors will be paid as much as your funds allow for, your assets will be sold, and a trustee will be appointed. Corporations, limited liability companies, partnerships, and sole proprietorships (depending on income) are all eligible to file Chapter 7. Read more about small businesses filing Chapter 7.
  

• Chapter 13: This option is only available to sole proprietorships, i.e. businesses that are owned and operated by just one person. Unlike Chapter 7, Chapter 13 is a restructuring option and can allow you to continue running your business. Read more about the debt limits placed on individuals filing Chapter 13.<
  

• Chapter 11: Fair warning—this option is not without its risks. But it’s the only option if you want to continue operating and restructure your LLC, corporation, or business you run with co-partners. If you’re an individual business owner but you have too much debt and therefore don’t qualify for Chapter 13, this is also your only option.
  
  With Chapter 11, the bankruptcy court approves a plan of reorganization for restructuring your business finances. You might need to sell off assets or downsize your business. Essentially, the goal is to make sure you can continue operating, through balancing expenses and income and helping you regain profitability.

Chapter 11 for Small Business Owners

Plenty of household names, like Delta Airlines, have made the news after filing Chapter 11. But you don’t have to be a household name—or even a lesser-known national corporation—to file.

While the rules for filing Chapter 11 are often the same for small businesses as they are for larger corporations, a few special provisions help small business owners reduce restructuring expenses, like legal costs, throughout their bankruptcy case. It can also be a much faster process for small business owners. These provisions include a court-mandated deadline, working without a creditors’ committee, and additional oversight from the U.S. Trustee’s office, among others.

The Process of Filing Chapter 11

Of course, filing Chapter 11 is no walk in the park. Filing for bankruptcy either personally or for your business might be worth it in the long run, but it is taxing. It’s a good idea to know what you’re getting into.

When you file Chapter 11, you automatically enter into a stay. You must formally—in a written statement—disclose your reorganization plan with the bankruptcy court, in exchange for which you will receive protection in the form of the stay. Your statement must include information on your company’s business affairs, liabilities, and assets.

That’s right, for bankruptcy to be successful, every detail must be disclosed—and your creditors must approve your statement. This is because creditors need to be able to make an educated decision regarding your proposed plan.

A confirmation hearing will take place next, where your plan for reorganization will be up for discussion. The bankruptcy court will either confirm or reject the plan. If confirmed, you can continue running the business in order to pay back your creditors.

Challenges & Benefits of Filing Chapter 11

Filing for bankruptcy, of course, is not without its drawbacks. Though there are certain concessions and exceptions made in the case of small business filings, Chapter 11 can be quite expensive. It could take you years to repay all debts.

However, just like taking on business debt can be helpful, filing Chapter 11 and having your reorganization plan approved can help strengthen your company. A better internal structure might mean more profitability, which could benefit your business in the long run—even after your debts have been paid off. You might even be able to prevent the court from selling off assets that your business needs in order to operate.

Of course, it’s never a good idea to make a hasty decision to file for bankruptcy—it will stay on your credit history for 7-10 years. Be sure to explore all your options before settling on what to do with your business in the near future.

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from Fundera Ledger https://www.fundera.com/blog/bankruptcy