Bankruptcy is a viable, honest means of giving your business a fresh start. Of course, it may not be the right fit for every business in financial turmoil. You would need to speak with your attorney or an otherwise qualified expert to know for sure. Common forms of bankruptcy for businesses include chapter 7 and chapter 11 bankruptcy. The form that best suits your business will depend on a few factors and it may help you to understand the difference between each type.
Chapter 7 bankruptcy – liquidation bankruptcy
In chapter 7 bankruptcy, assets are seized and sold off and then those funds are used to pay creditors back on behalf of the debtor. For your business to qualify for chapter 7, it would have to go through a means test. The means test is the bankruptcy court’s way of determining whether your business has the means of paying back creditors or if liquidation is necessary. However, not all your business debts may be discharged under chapter 7.
Chapter 11 bankruptcy – reorganization bankruptcy
Reorganization bankruptcy helps businesses in debt develop a plan for repayment without losing their significant assets. If you have overwhelming debt but are still within some means of repaying creditors and eventually bringing your business to a survivable means of operation, chapter 11 may be right for your business.
Note also that for both chapter 7 and chapter 11 bankruptcies, filing will implement an automatic stay that prevents creditors from pursuing collections from your business.