Business bankruptcy is really a misnomer. There is no separate bankruptcy for businesses. Which chapter of bankruptcy one chooses depends on the legal structure of the entity (i.e. is it a corporation, partnership, or an individual) and what is to be accomplished by filing the bankruptcy case.
Business Run By Individual(s)
An individual can run a business without it being a corporation.
I do it. Many others do as well.
In these cases, there is no separateness between the individual and the business, so all assets, debts, income and expenses of the individual and their business are included in the case.
An individual can file under
- Chapter 7 (liquidation),
- Chapter 11 (debt/business reorganization), or
- Chapter 13 (individual repayment plan)
based on a variety of factors. Depending on the type of business, if the goal is to continue the business operating, then Chapter 7 is probably not a viable option since Chapter 7 requires the business to cease operations unless the Trustee decides to take control and run it.
As a practical matter, if the debtor’s business is personal services, such as a musician or an artist, then there technically isn’t anything to “stop” because you can simply start the same business over again after the Chapter 7 case is filed.
Any assets you use in the business, of course, will need to be exempted under applicable law or else they will be sold by the Trustee in a Chapter 7, thus making it more difficult to “continue” the business after a Chapter 7 case. Thus, in many instances, a Chapter 13 or Chapter 11 is preferred in these instances.
Corporations and Partnerships
Corporations and partnerships are limited to either Chapter 7 or Chapter 11. Chapter 11 would be filed if the goal is to continue business of the corporation/partnership. Chapter 7 can be used if the business is stopping.
Corporations do not receive discharges of debts in Chapter 7 cases, so there is limited utility in filing them for a corporation. Click Here to see some advantages to filing Chapter 7 for a Corporation, however.
Chapter 11 is a reorganization and requires proposal of a repayment plan to creditors, on which the creditors get to vote. It is an expensive and involved process, but can be very beneficial if handled correctly and the creditors agree.
Regardless of which type of bankruptcy you or your business need to file, it is important to consult with a knowledgeable bankruptcy attorney in your area about your options.
This article is part of my bankruptcy alphabet series
More Bankruptcy Alphabet Postings for the Letter B:
- Cate Eranthe thinks B Is For Beware
- David Axinn says that B Is For The B Word (not THAT one)
- Lurie Favors says B is for Bankruptcy Estate
- Bill Balena thinks B is for Buy Low Sell High
- Athena Legal regards B is for Budget
- Christopher McAvoy thinks B is for Bankruptcy
- Christopher Carr agrees B is for Business Bankruptcy
- Stuart Ing thinks B is for Best Interest of Creditors
- Jeena Cho discusses Borrowing
- Lewis Roberts analyzes the Bar Date
- Mitchell Goldstein finds B is for Bankruptcy Estate
- Raymond Kempinski believes B is for Bank Account Levy
- Dorota T speaks of bad faith filings
- Peter Behrmann says B is BAPCPA
- Bret Nason believes B is for Bank Tips
- Monica Shepard believes B is for Bailout
- Daniel Winter talks about B is for Bank Account
- Kyle Lindsey discusses Bankruptcy Mills
- Bob Doig analyzes bankruptcy petition preparers
- Christine Wilton also discusses BPPS
- Chris Carr thinks B is for Business and Individuals
- Rick Palmer discusses Businesses and Business Debt
- Shawn Wright about the bankruptcy timelines
- Nancy Martin finds B is for Best Efforts
- Michelle Kainen talks about Benefits of Chapter 13
- Birmingham Bankruptcy Blog: Budget
- Eric Southward: Bad Credit
Image Courtesy of Takomabibelot