3 Types of Bankruptcies to Consider if Your Business Is Declining

Many people dream of owning a business. They see themselves as being successful, offering something everyone wants, and making a positive difference in the world. Unfortunately, the best-laid business plans can fall right through your hands – especially when it comes to things outside your control. Here are 3 types of bankruptcies to consider if this happens to your business.

Read on for more.

Introduction

Poor decisions and bad timing are often to blame for declining business. But some situations appear out of the blue and cause irreparable damage. Take a moment to think back to the number of companies that suffered due to the global pandemic and the resulting shutdowns. Some businesses were able to seek help and even reinvent themselves. These were able to come back strong. Others, however, never stood a chance. Small businesses, in particular, were devastated by the pandemic and shutdowns.

So, what do you do when your business isn’t working out the way it should? When the money coming in doesn’t cover the money going out, and all other avenues have been exhausted, it may be time to seek bankruptcy relief, and there are 3 types of bankruptcies you might initially land on.

Here are the 3 types of bankruptcies to consider if your business is declining.

Chapter 7 Bankruptcy

One of the most common types of bankruptcy is chapter 7, used by individuals, couples, and businesses. While sole proprietors are the ones who most often file a chapter 7, partnerships, limited liability companies, and corporations are all eligible. So, who is it best suited for? Those businesses that do not have enough funds to keep the business up and running – and do not have the funds to pay off any current debts.

Chapter 7 bankruptcy focuses on the liquidation of the business assets as well as closing the business. A trustee steps in to liquidate everything it can and divide it to pay off as much debt as possible to the creditors. The company will shut down entirely, and all officers will be dismissed.

Once chapter 7 is filed, the company no longer operates. Once the company has been completely liquidated and the creditors have received their share, a discharge takes place. Sole proprietors are no longer required to pay back any debts owed on behalf of the business once they receive the discharge. However, it is essential to note that other business types, such as partnerships, limited liability corporations, and corporations, do not receive a formal discharge in a chapter 7 bankruptcy. As a result, any personal collateral or guarantee on loan can still be subject to collection by creditors.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy involves the reorganization of the business. In other words, it doesn’t shut it down but addresses certain debts. Unlike the above bankruptcy used when there are no funds to keep the business afloat, those seeking a chapter 11 have the means to keep going – they just need a little help.

Once a chapter 11 bankruptcy is filed with the court, it continues to run as usual. The same officers and management will remain in control. With the court’s approval, they can also continue making business decisions.

There is no liquidation involved in chapter 11 bankruptcy.

So, what is this one used for? Many businesses seek relief with this protection to reorganize their debts and assets. They work to eliminate outstanding debt by selling no longer necessary assets. Long–term debts can get restructured. And there may even be some new types of financing.

Eligibility for a chapter 11 bankruptcy requires proving you are receiving revenue currently and in the foreseeable future. You will need to create a reorganization plan (including the details discussed above) that must be approved by both the court and any creditors you have. This gives you a chance to restructure payment plans with them and perhaps even negotiate better repayment terms (often allowing additional time – even up to 20 years).

You don’t want to shut down your business in chapter 11 – you want to keep it going in a forward motion. This process will help you to make the means of doing so more accessible.

Chapter 13 Bankruptcy

Another type of bankruptcy that focuses on reorganization is chapter 13. Typically used by individuals, sole proprietors can take advantage of this type. To do so, the bankruptcy action is filed under their name – not the business name.

In a nutshell, chapter 13 is much like chapter 11’s intentions. The difference is that it is much simpler. Without all the intricate details that come with more prominent corporations, sole proprietors can file a petition to have the court help them reorganize their debts successfully. And, in the end, they can continue to stay in business.

With a chapter 13 bankruptcy, you can only have a small amount of debt, which can be reorganized so that you may pay it back in about 3 to 5 years. Be sure to check with your bankruptcy attorney, as this type sets debt limits to be eligible for filing.

Hiring a Bankruptcy Attorney

If you are struggling financially, you may think that filing a bankruptcy petition on your own may be more cost-effective. Unfortunately, a bankruptcy proceeding has many intricate parts – and making mistakes could cost you relief entirely.

Don’t take that risk.

Speak to a bankruptcy attorney who has experience working with businesses about these 3 types of bankruptcies. Go over your current situation and what your future goals are. What is the health of your business? Do you want to liquidate everything and close the doors for good? Or are you more interested in continuing to bring in revenue but reorganizing your debts? Together, you will be able to look at your current situation, analyze the money coming in and the debts owed, and then come up with the best plan to help you find relief from the court.

Legal representation through the process is a necessary business decision.