Small Business Bankruptcy: Chapter 7 or Chapter 13

Businesses must sometimes file for bankruptcy too. Filing for bankruptcy can be a thorny issue for a small business. Under Bankruptcy Code, it’s possible for a small business to file for bankruptcy under Chapter 7 and Chapter 7 law. But it can be difficult to determine which is best.

The bankruptcy law to file under can change depending on the circumstances of the business, the nature of the company, and the type of debt. It’s strongly recommended to hire a local lawyer, like a bankruptcy lawyer in Scottsdale if you live in Arizona, to seek advice. However, there are general facts that business owners should be aware of.

Read ahead to find out the pros and cons of filing for Chapter 7 or Chapter 12 bankruptcy as a small business:

Chapter 7 Bankruptcy for Small Businesses

Chapter 7 bankruptcy is available to small businesses just like for individuals. Small business owners can file for Chapter 7 bankruptcy either individually themselves, or as the business. If you have business debts you own personally, those will not be discharged if you file for business bankruptcy. If you are the sole proprietor of the company, then both you and the business will be considered a single legal entity. If you have business debts on your own, it’s recommended to file for individual and business bankruptcy, both, to eliminate most unsecured debt.

Advantages

Under Chapter 7 bankruptcy, certain unsecured debts can be discharged by a bankruptcy court. This law can be used in certain circumstances to wipe out debts that are under the name of the owner of the business. Perhaps the biggest advantage of Chapter 7 bankruptcy is that it allows a company to operate even after having filed for bankruptcy. Chapter 7 bankruptcy is most beneficial for corporations, limited liability companies, and partnerships. It’s because this law allows quick and easy liquidation. When you file under Chapter 7, the company assets becomes the responsibility of a court-appointed trustee. This trustee will liquidate assets and arrange payment to creditors. The owner is free from these responsibilities.

Disadvantages

For companies that are owned by more than one person. Chapter 7 bankruptcy does not allow for discharge of debts. Certain assets are not allowed exemptions for businesses under this law either. Only liquidation is possible.

Chapter 13 Bankruptcy for Small Businesses

Typically, only individuals are allowed to file for Chapter 13 bankruptcy. However, if the business is solely owned, it is possible to file under this law.

Advantages

Sole business owners can discharge certain business debts under Chapter 13. A portion of debts will have to be paid back, but through a judge reviewed payment plan. However, if Chapter 7 doesn’t allow for exemptions, Chapter 13 may. Chapter 13 offers the main advantage of wiping out personal liability.

Disadvantages

The biggest disadvantage is that partnerships, LLCs, and multi-owner companies cannot file under this law. Also, Chapter 13 bankruptcy proceedings can go on for longer than Chapter 7. Debt discharge may not always wipe out business liability.

Consult with your lawyer and consider which of the above chapters is best for your bankruptcy proceedings.

 

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