Bankruptcy for Business Debt

Bankruptcy may be the solution when your business has unmanageable debt. The legal actions threatened by the creditors may affect your personal life if you have committed yourself to any personal guarantee or signed any contract, since you will have to repay those of business debts. In situations where debt consolidation and debt settlement are of no use, you are forced to file for bankruptcy.

Filing for Bankruptcy

There are various bankruptcy chapters, and each is unique in its method of discharging your debts. The eligibility criteria under each chapter also varies and hence it is important to understand the basic details of each. Only then you would be able to decide under which chapter your business debts can be discharged the most efficiently.

Chapter 7

This is the most commonly used bankruptcy chapter and is also termed as “straight bankruptcy.” Any individual who cannot repay the debts after meeting his living expenses is eligible to file under this chapter. Here the assets of the applicant (individual or business entity) are liquidated to clear the debts. Almost all assets, except those that are exempted, would be liquidated to discharge the debts. Exemptions are provided for basic necessities such as clothing, mortgage and car payments, furniture and groceries. However, the value of these exemptions varies from state to state. If any amount of debt is outstanding even after liquidation, those debts are discharged.

Chapter 13

People with a steady flow of income and who are in possession of valuable properties can opt for this type of bankruptcy to manage their outstanding debts. Since all the assets that are not covered by exemptions are liquidated in Chapter 7 bankruptcy, people with valuable assets prefer Chapter 13. According to this chapter, the applicant should agree to repay the debts as per the new schedule over a period of three to five years. Hence, it would be suitable for small businesses which do not wish to lose their assets while clearing their accumulated debts.

Chapter 11

This bankruptcy chapter is intended for business corporations. It is also referred to as a “business reorganization plan.” However, only business entities with a steady income or the possibility of an income are eligible to file under this chapter. Thus, it ideally suits large entities with dependable cash flow to manage their payroll. Here a trustee and a committee are set up by the bankruptcy court to overlook the proceedings. The trustee will work in collaboration with management to run the business continuously, while the committee would work with the creditors to come to a conclusion about the new debt repayment schedule. The main problems coinciding with this bankruptcy are that it is time consuming and expensive.

Obtaining Legal Assistance

You should seek the assistance of a bankruptcy attorney to know the exact details about the procedure. His help can be crucial for your financial recovery.