Sustainable growth through proper cash management should be the primary goal of any business. Unfortunately, even the most well-managed businesses can stumble into difficult times.
Business owners faced with times of crisis may consider filing for bankruptcy.
Filing for several types of bankruptcy may be necessary, depending on the circumstances. Two of the most commonly filed types are Chapter 7 and Chapter 13 bankruptcy. The two major types generally vary in 1) how they are filed 2) how they affect the business.
For businesses or individuals wondering how the two chapters of bankruptcy differ, check out the detailed outlines below.
Understanding the basics of Chapter 7 bankruptcy
Who can file for Chapter 7 bankruptcy?
Both business enterprises and individuals are eligible to file for Chapter 7 bankruptcy. Small business owners can file for themselves, or they can file on behalf of their business.
However, in the case of a sole proprietorship, both the personal and business debts will be resolved in the same Chapter 7 case. Many business owners opt to file for Chapter 7 bankruptcy because it absolves the owner from any obligation to pay off their business debt.
On the other hand, it’s essential to know that not all individuals and entities are eligible to file for
Chapter 7 bankruptcy. This is where the Chapter 7 means test enters the picture. It’s a test used
to prove, using a specific formula, that an individual or an entity doesn’t have enough disposable
income to pay off the debts. If the applicant for bankruptcy fails to pass the test, they may be
eligible for Chapter 7 bankruptcy. But if you want to know more about the Chapter 7 Means Test, you can check out some reliable legal resources online to get more information.
What does Chapter 7 bankruptcy entail?
Chapter 7 bankruptcy is commonly referred to as the liquidation chapter. Although, in most cases, a property is not liquidated or repossessed. Chapter 7 bankruptcy is ideal for individuals or businesses that have accumulated high consumer debts they aren’t able to pay.
Once a business files for Chapter 7 bankruptcy, an order for relief is implemented. Upon any collection efforts, the automatic stay takes effect.
The automatic stay protects debtors from the creditors who might initiate a lawsuit in an effort to collect unpaid debts. A trustee is appointed by the bankruptcy court to determine if the debtor has any valuable property that can be sold off to repay part or all of the debt. Much of personal property is exempt from liquidation, depending on the value of the asset.
Homes with an abundance of equity or secondary investment properties can be subject to liquidation. Within reason, necessary property such as cars and vital household goods can be exempt from liquidation
If the debtor has a property that is subject to liquidation, the debtor must pay the trustee an equal market value amount or turn over the property to the trustee. On average, most of the debtors who file for bankruptcy under chapter 7 have no liquefiable property.
The bankruptcy court will discharge any remaining debts at the end of the liquidation. This gives the debtor a fresh new start, free from any debt. After eliminating all business debts with bankruptcy, the business can continue operating–if the business is service-oriented and does not require extensive inventory or equipment.
In a mechanism of Chapter 7 bankruptcy, one can close down and liquidate a limited liability company (LLC) or corporation, transparently. Chapter 7 is not a suitable fit for partnerships, however, because of the risk of the partner’s property being liquidated by the trustee.
Understanding the basics of Chapter 13 Bankruptcy
Who can file for Chapter 13 bankruptcy?
Because of Chapter 13 restrictions, business entities such as corporations, partnerships, and limited liability companies can’t file for chapter 7 bankruptcy, only individuals can. However, much like in Chapter 7 filings, sole proprietors can file Chapter 13 bankruptcy on behalf of their businesses. This enables the reorganization of business and personal loans.
What does Chapter 13 bankruptcy entail?
Chapter 13 bankruptcy authorizes the debtor to reorganize all the debts and choose a repayment plan of 3-5 years. Under a mechanism of Chapter 13, debtors with enough disposable incomes can reorganize their business and personal debts and pay them in a 60-month repayment plan.
By filing for Chapter 13 bankruptcy, an individual with government tax debt can ensure that the government does not levy on personal or business assets –giving debtors time to pay off dischargeable debts.
Under this chapter, a debtor has the privilege to design his or her own repayment plan. Said repayment plan is still subject to the bankruptcy court’s approval, however, and requires a proposal on how the debtor intends to pay priority debts, unsecured debts, and secured debts.
At the end of the repayment period, any remaining debt is discharged by the court. In the event the debtor defaults any of the terms of the repayment plan, the bankruptcy court has jurisdiction to dismiss the Chapter 13 bankruptcy file, in which case the individual tumbles back down to ground zero. Although, if the cause of default is reasonable, the court may decide to discharge part of the debt and allow the debtor to amend his repayment plan.
By filing for Chapter 13 bankruptcy, the debtor can ensure that the business continues to operate, as he or she reorganizes the debts. The business assets are also well-protected under Chapter 13.
If you are not sure of how to file or which type of bankruptcy to file, you should consider employing the services of a professional law firm, such as wh Law. Whether it’s consulting the experts or doing a little research of your own, as a businessperson, it certainly pays off to familiarize yourself with the basics of bankruptcy.
