Types of Small Business Bankruptcy


Starting a small business is tough, and some small businesses do end up having to file for bankruptcy. If your small business is struggling to stay afloat, and if a financial workout isn't an option, you may have to file for bankruptcy. This will allow you to repay or discharge your business's debts under the protection of a court of law so that you don't have to worry about losing absolutely everything. There are, though, at least three different types of small business bankruptcy, and you should know a bit about them before contacting a bankruptcy lawyer.

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Under Chapter 7 bankruptcy, you'll basically liquidate your small business and never try to get it going again. When you file for this type of bankruptcy, you generally have such a large pile of debts that it's just not an option to pay them all back, and you don't have a lot of assets to use to pay back the business. Basically, this type of bankruptcy relies on a trustee to disperse the business's assets among creditors, and whenever everything is paid or the assets have run out, the owner receives a discharge, meaning he or she is no longer obligated to pay the debts.

A Chapter 11 bankruptcy might be a better option if you think your business could continue. If you have quite a few assets and aren't totally drowning in debt, this type of bankruptcy might be for you. Basically, a trustee will reorganize the business and will write out a formal plan to pay the creditors, who will then approve or veto the plan. The debts may not be paid off for more than twenty years, but they'll be paid eventually, and businesses can sometimes get back on their feet after this type of bankruptcy.

You can only file for small business bankruptcy under chapter 13 if you have sole proprietorship. Basically, you create a repayment plan and file it with the court. You probably won't have to pay all of your debts, but the amount you do have to repay will be based on many factors, including your assets and your income. Sometimes, small business owners who have linked their business and personal assets will use a Chapter 13 bankruptcy filing to avoid losing their personal assets as well as their professional ones, which is why this choice is a good option for many sole proprietorships.


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