What Happens When Your Business Files for Bankruptcy?

Has your business racked up so much debt that you’re not sure how you’ll ever repay it all? Are you considering filing for bankruptcy to relieve the financial burden? As a business owner, choosing to file for bankruptcy is a major decision. It can be a frightening and overwhelming process, especially if there’s a possibility that you’ll be held personally liable for the business’s debt.

Before you file for bankruptcy, it’s important that you gather as much information about the actual bankruptcy process, so you can make an educated decision about how to move forward.

With that in mind, here are a few important facts you need to be aware of as you begin researching your options.

What’s the Effect of a Business Bankruptcy Filing?

Even if your business is struggling with significant debt, that doesn’t necessarily mean filing for bankruptcy is the right answer. The extent to which your business can benefit from filing for bankruptcy will depend on a variety of factors, such as:

• The legal structure of your business (e.g., sole proprietorship, general partnership, limited liability company, or corporation)
• Whether you are personally liable for debts of the business
• Whether you wish to continue or shut down the business

The type of bankruptcy you will file for will depend, in part, on those factors. The reason for that is because different types of bankruptcy offer different types of benefits depending on your business structure and whether you intend to maintain or liquidate the business.

There are several different chapters of bankruptcy that are available to certain businesses under the federal bankruptcy code. How a bankruptcy filing will affect your business will depend on a number of factors, including which chapter you file under.

Here’s a brief overview of Chapter 7, Chapter 11, and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

If your business is structured as a partnership, LLC or a corporation, filing under Chapter 7 may not make the most sense, since those business structures cannot discharge debt through a Chapter 7 bankruptcy.

However, if you’re a struggling small business owner and a sole proprietor, filing Chapter 7 bankruptcy might provide a simple path to shutting down your business or perhaps even saving it. 

Here’s how it works:

The bankruptcy court treats a business organized as a sole proprietorship as an extension of the owner. In other words, if you’re a sole proprietor, you and your business will be treated as one entity. Filing a Chapter 7 bankruptcy as a sole proprietorship means liquidating the nonexempt assets, which may or may not prevent you from running your company following the bankruptcy. 

Why is that important?

In some cases, you can file for Chapter 7 to discharge any qualifying debt and continue operating your business. Moreover, you can use bankruptcy exemptions to protect your personal liabilities, too.

If you’d like to learn more about Chapter 7 bankruptcy, contact the Tampa CPA Firm, Rivero, Gordimer & Company. 

Chapter 11 Bankruptcy

Filing Chapter 11 bankruptcy is usually the last resort for small businesses. That’s because it’s a complex, risky, and expensive endeavor. Unfortunately, it’s the only bankruptcy option available if you want to continue operating a company structured as a partnership, LLC, or corporation.

Under Chapter 11, your business can restructure its debts through a reorganization plan that must be approved by the bankruptcy court. In most cases, you must provide a written disclosure detailing your business’s financial situation and plan for reorganization to gain Chapter 11 protections.

This information is designed to provide creditors with details about you and your business, so they can make an informed decision about your proposed plan for reorganization. Your business’s creditors must approve the disclosure statement. After that, the bankruptcy court will hold a hearing for the reorganization plan. If the bankruptcy court confirms the plan, you or a bankruptcy trustee will operate the business to generate money to repay creditors.

If you’d like to learn more about Chapter 11 bankruptcy, contact the Tampa CPA Firm, Rivero, Gordimer & Company. 

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows debtors to keep their personal assets while reorganizing and paying off debts through a repayment plan. Typically, Chapter 13 repayment plans last three to five years. The length of the repayment plan and how much you have to repay will depend upon your income, expenses and the types of debts you’ve incurred. Naturally, the greater your income, the more the court will require you to pay. Also, there are certain debts called priority debts that you must repay in full regardless of your income.

There is just one problem – Chapter 13 bankruptcy is usually only available to individuals, not business owners. There is, however, a loophole for sole proprietors. Although a sole proprietor won’t be able to file under the business name, the court will allow the individuals to reorganize both personal and business debts (similar to Chapter 7).

If you’d like to learn more about Chapter 13 bankruptcy, contact the Tampa CPA Firm, Rivero, Gordimer & Company. 

Closing Thoughts

As you can see, filing for bankruptcy when you own a business can be complicated. Make sure you do your homework to determine the best way to protect your personal and business assets before filing for bankruptcy.

If you would like to talk with a professional CPA about your bankruptcy options, contact the accounting firm, Rivero, Gordimer & Company, today!