Filing for bankruptcy might be beneficial if you can’t afford to repay your business debts. Many business owners struggle with operational expenses. You might have adequately managed your debt but now struggle to make payments because of cash flow issues, a poor economy, or another problem.
Fortunately, you have options as a business owner. You should consider various factors to determine the type of business bankruptcy you should file. Each type serves different purposes. Whether you want to dissolve your business or reorganize your debts, there’s an option that could work for you.
Establish Your Goals
Before you file for bankruptcy, identify your goals for the future of your business. You might want to continue operations while paying off your debt. If you’re ready to close the doors to your company for good, bankruptcy can help you satisfy your debt with your assets.
Different bankruptcy options are available for different types of businesses. You will need to keep in mind the type of business you have before choosing the best bankruptcy option for you. The most common business structures include:
- Limited liability companies (LLC)
- Sole proprietorship
If you structured your business as a sole proprietorship, your business entity isn’t separate from your personal assets. You could file for personal bankruptcy to handle all your debts, including debts your business incurred.
A registered business entity, such as a corporation or LLC, allows you to file for bankruptcy for your business only. Since certain business structures are liable only for business debts, you could often avoid personal liability.
Your goals will determine which type of bankruptcy you should file. Bankruptcy can accomplish various outcomes, such as:
- Keeping the business open – Instead of ceasing operations, you can continue running your business while restructuring or reorganizing your debt.
- Closing the company – If shutting down your business is the best option, filing for bankruptcy could wipe out qualifying debts and allow you to sell assets to satisfy creditors.
Types of Business Bankruptcy
Below are three types of bankruptcies for businesses. The type you choose depends on your goals and the type of business structure you have.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy uses liquidation to pay off outstanding debt. You must shut down your business and forfeit your assets when you file this type of bankruptcy.
Business owners can file for Chapter 7 if their business is a:
- Sole proprietorship
The process differs between sole proprietorships and other business structures.
When you file a Chapter 7 bankruptcy as a sole proprietor, unsecured debts are wiped out. That means you do not need to pay back qualifying debts, such as:
- Utility bills
- Credit cards
- Back rent
Although Chapter 7 can relieve sole proprietors of most of their personal and business debts, their business is not a separate legal entity. As a result, your personal assets are at risk, and you might be personally responsible for your business assets. Some assets are exempt, but creditors could seize items, such as vehicles or equipment, to recover the money you owe.
LLCs, Partnerships, and Corporations
You can’t eliminate any of your business debts if you structure your business as a partnership, corporation, or LLC. You must pay back your creditors using your assets. However, the burden of selling your assets and paying off your debt falls on the bankruptcy trustee.
The bankruptcy court appoints a bankruptcy trustee to manage your case and liquidate your assets. They are responsible for selling your assets and using the proceeds to pay your creditors.
Chapter 11 Bankruptcy
The business structures that qualify for Chapter 11 bankruptcy include:
- Sole proprietorships
You can propose a reorganization plan to pay back your creditors while continuing to run your business. The plan might include reducing your business expenses, downsizing operations, or renegotiating your debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is only available for individuals or sole proprietors operating their business in their own name. Businesses structured as corporations, LLCs, and partnerships don’t qualify for Chapter 13.
Chapter 13 is similar to Chapter 11. You can continue operating your business while creating a repayment plan to repay your creditors. Your new payments might be lower than the original required payments over a three to five-year term.
Contact Bradford Law Offices Today
The Raleigh business bankruptcy attorneys of Bradford Law Offices have helped business owners with their bankruptcy cases since 1996. We have the experience and resources to determine which options might best help with your financial problems. You can count on our legal team to protect your interests and help you move forward to a more successful future.
Call Bradford Law Offices at (919) 758-8879 for a consultation with a dedicated North Carolina business bankruptcy lawyer if your business faces debt and you want to learn whether filing for bankruptcy is right for you.