Bankruptcy is intended to help small business eliminate or repay debt. Federal bankruptcy courts oversee the process and provide debtor protection.
Sole proprietorships are their owners’ legal extensions. Their owners are responsible for all the firm’s assets and liabilities. Sole proprietorships typically file under Chapter 13 which is a reorganization bankruptcy.
Corporations and partnerships are separated from their owners as legal business entities and generally file under Chapter 7 or Chapter 11, which is a reorganization bankruptcy for business.
Individuals usually file under Chapter 13. Sole proprietorships also file under it because these businesses are indistinguishable from their owners.
Reorganization, not liquidation, is this filing’s purpose. Proprietorships may stay in business by repaying their debts.
Earnings, the amount owed, and the property owned determines the repayment amount. If personal assets are intermingled with the business, a Chapter 13 filing may allow debtors to keep personal assets like their house.
This is a liquidation bankruptcy. It may be preferable when the business has no realistic future because its debts are so overwhelming. Along with corporations and partnerships, it may be used for sole proprietorships. Business with income over a certain level may not file under Chapter 7.
Chapter 7 is suitable when the business lacks significant assets. It may be inadvisable to reorganize a small proprietorship under Chapter 13 because the business is an extension of its owner’s skills.
The court appoints a trustee to take possession of the business’ assets and distribute them among creditors. Once the assets are distributed and the trustee is paid, a sole proprietorship receives a discharge from the debtor’s obligations. Partnerships and corporations may not receive a discharge.
This is typically used by partnerships and corporations that have a reasonable chance of continuing in business. Sole proprietorships which do not qualify for Chapter 13 because of high income levels also use this.
Companies reorganize and continue under a court-appointed trustee. A detailed reorganization plan outlining how the business will deal with creditors is filed. Businesses may terminate contracts and leases, recover assets, repay some debt, and discharge others. Creditors must vote on the plan which will be approved by the court if it is fair and equitable.
A law taking effect in Feb. 2020 provides relaxation of some Chapter 11 requirements. The appointment of a committee of creditors or their approval of a court plan for the business is not required for a business which files an application.
Bankruptcy may be complicated. Attorneys can help business with these and other options.