What Happens After Filing a Business Bankruptcy

The business environment is harsh, and sometimes, businesses face challenges that can lead to their downfall. In most cases, such businesses are faced with the reality of filing for bankruptcy. Bankruptcy is not the desired result in any business, but it is a process that can help a business eliminate debts and survive.

However, many business people do not know what happens after business files for bankruptcy. In this article, we discuss the issues surrounding bankruptcy and what happens once your business files for bankruptcy.

What to do in case you want to file for bankruptcy

Filing for bankruptcy can be complicated, mainly because there are different options, and each has its advantages and disadvantages. Whether you are an incorporated entity or sole proprietorship, you need to consult a bankruptcy attorney to help you with the case. If you need more information regarding the matter, click here to find out how you can successfully connect with a company that will ensure the best outcome for your business. You will be able to explore your options and make the best decision for your company under the watchful eye of a bankruptcy attorney.

Types of bankruptcy

Businesses file for different types of bankruptcy, depending on their structure. The three different types depending on whether they are corporations, sole proprietorships, or partnerships. Partnerships and corporations file for bankruptcy and are protected by Chapters 7 and 11. Sole proprietorships, on the other hand, are protected under chapter 13 bankruptcy.

Chapter 13 is a reorganization bankruptcy type that allows debts to be adjusted for sole proprietorships.

Sole proprietorships use it because a single person holds them, and these businesses are indistinguishable from their owners. The main aim when filing for bankruptcy here is to reorganize rather than come to the point of liquidation. As a business, you are expected to file a plan that shows how you will repay your debts with the bankruptcy court. During this time, you will be allowed to stay in business. The amounts to be paid rely on your earnings, the debts, and your properties. 

Many businesses whose owners use their personal property for a business can survive property loss if they file for bankruptcy under this Chapter instead of chapter 7.

Chapter 7, on the other hand, is used by businesses that expect liquidation. In the cases where this Chapter is applied, the companies at hand have no viable future because the debt the firm has is overwhelming, and reorganization cannot be of help. Partnerships, corporations, and sole proprietorships can all file for bankruptcy under chapter 7. Still, sole proprietorships are more likely to file for bankruptcy under chapter 13, so they do not lose their personal property. 

A business can also file for bankruptcy under chapter 7 if it does not have any significant assets or a sole proprietorship that relies on the owner’s skills. However, for a business to successfully pass for liquidation, the business owner/applicant must be subjected to a means test. This determines if their income level can allow for settlement. If they do not meet that threshold, the application is rejected. If, however, the business meets the requirements, then it can be dissolved. 

Once the business is dissolved, a trustee is given the responsibility of possessing the company’s assets and redistributing it among the creditors by the bankruptcy court. Once the assets are distributed among the creditors, and the court’s trustee is paid, the business owner is discharged. In this way, they are released from any debt obligations that they have. Only sole-proprietorships receive a discharge after liquidation. 

Chapter 11 also allows for business reorganization. The Chapter is favorable for sole proprietorships with income levels that do not allow them to file for bankruptcy under chapter 13. It is also suitable for partnerships and corporations. The business is allowed to resume activity under the watch of a trustee appointed by the bankruptcy court. The company has to present a reorganization plan file with details on how they will repay the creditors. They have options including recovering assets, terminating leases and contracts, and partially repaying debts as they seek to return to their feet. This plan is usually brought before the creditors who vote for it, and then it is taken to the bankruptcy court for approval. These plans are lengthy and complicated. The Small Business Reorganization Act of 2019 enacted a subchapter of Chapter that does not necessitate creditors to approve the court plan.

Filing for bankruptcy is a reality that many businesses face, especially in their initial years of operation. The kind of bankruptcy that a business files for depends on the type of business and its circumstances. A company will file for bankruptcy under chapter 7, 11 or 13. Contacting a bankruptcy attorney to guide you through filing for bankruptcy will ensure that you put your best interests at heart as a business.