Bankruptcy may leave a negative impression to people who declare it. However, bankruptcy is considered as the last resort to fix financial problems. For businesses that may need to file for this financial move, they have to understand what is business bankruptcy and the technicalities behind it.
Understanding Business Bankruptcy
Business bankruptcy, as the term implies, is when a business needs to be declared as bankrupt due to accumulating financial problems. There are specific financial situations when a business may need to file for bankruptcy. In some cases, a business may be forced to filing bankruptcy with creditors playing a crucial role in the process.
Types of Business Bankruptcy
Answering what is business bankruptcy is different as there are three main types of bankruptcy that can be filed according to specific chapters depending on the business type. Sole proprietorship businesses mean the business is owned by a single person. Sole proprietorship businesses can file bankruptcy through Chapters 7, 11 and 13.
On the other hand, partnerships and corporations may only apply for Chapters 7 or 11 bankruptcy. They have different legal entities aside from the actual owner. Hence, they will only be allowed to file bankruptcy for a specific type.
Bankruptcy According to Chapters
Chapter 7 bankruptcy is referred to as the last resort for businesses that don’t have any other solution for their financial issues. Their financial problems are so severe that restructuring won’t do anything for them. Most of the time, businesses that will be given this verdict are those that will only continue to accumulate debts to pay other debts. Since these businesses don’t have any future left, the business will be liquidated.
A trustee will handle the case in handling assets and assigning them to pay creditors. Discharging will be different for different business types. Sole proprietors will be discharged from their financial obligations once debts are settled. The other two business types won’t be discharged from bankruptcy.
Chapter 11 is considered as a better option as it will only require the business to restructure and get it back to shape. However, this option is only offered for businesses that still have potential to make money. A trustee will be assigned to deal with the case and come up with a restructuring plan to keep the business running. He will also handle creditors by giving them a copy of the restructuring plan. Once approved, the restructuring will be carried out to keep the business operational.
Chapter 13 bankruptcy is also a restructuring plan offered for individuals, but it can also be used a sole proprietorship business. A trustee will come up with a repayment plan to settle all the debts. Unlike Chapter 7, people filing for Chapter 13 reserves some rights like keeping some assets like their own properties.
Getting Assistance from a Financial Expert
The technicalities behind bankruptcy can be challenging for business owners regardless of the size. Working with a financial expert like a bankruptcy attorney will make the process easier, while providing information for the filer about their financial status and settlement options.
There are many answers to people who are asking what is business bankruptcy due to different business types and their financial statuses. Consulting with an expert will ensure the filing process will be completed and settle all the debts.