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.
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