Sometimes small business firms don’t make it and have no option to enter into a small business bankruptcy filing. Bad financial decisions, unfavorable economic conditions and an increase in the cost of production are some of the factors that may lead to a small business bankruptcy filing. Bankruptcy is a legal undertaking heard in in federal court. It is designed to help financially strapped businesses either eliminate or restructure their debt. Based on the type of bankruptcy you file, a small business bankruptcy is either a reorganization or a liquidation. Business bankruptcies are usually described as either liquidations or reorganizations depending on the type of bankruptcy you file.
Business Bankruptcy – Chapter 7
When the business has absolutely no chance of regaining profitability, Chapter 7 bankruptcy may be the best choice. Usually referred to as liquidation, filing a Chapter 7 bankruptcy allows the Court to take possession of the business’s assets and sell them. The proceeds are then used to pay off creditors. After the assets are distributed and the trustee is paid, a sole proprietor receives a “discharge” at the end of the case.
A discharge means that the owner of the business is released from any future financial obligation for the debts. Partnerships and corporations are not entitled to a discharge.
Business Reorganization – Chapter 11
Chapter 11 is a better choice for businesses that are confident that they will generate a profit once their debt is reorganized. They have to prove this to the Court by filing a reorganization plan indicating how future funds will be used to pay back debt. Creditors will then vote on the plan. If the court finds the plan is fair and realistic, they will approve the plan. Chapter 11 bankruptcies are very complex and not all succeed. It usually takes more than year to confirm a plan. In cases in which companies do not qualify for a Chapter 11 bankruptcy, there are several other debt relief strategies available: