Filing for business bankruptcy
“Bankruptcy” isn’t a term anyone wants to think about, especially in regards to their own business. But did you know that filing business bankruptcy can actually be a smart choice? Certain types of bankruptcy allow you to keep your business, while others relieve you from debt obligation. Companies like Kmart, United Airlines, Chrysler and Marvel Entertainment (now the action-movie behemoth) have all bounced back from bankruptcy.
Business bankruptcy doesn’t mean you are a failure or that your life is over. There is life after bankruptcy, and you’re in the right place to discover it. Tony Robbins has mentored businesspeople from all walks of life, at all stages of their business. The key is to focus your energy, and most of all, keep believing in yourself. You’ll also want to get educated about business bankruptcy, starting here.
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Types of bankruptcies for businesses
There are three types of bankruptcies that apply to businesses. Some only apply to certain types of businesses and have limits on the debt that is allowed, and all have different purposes depending on your goals and the state of your finances. Filing business bankruptcy is a serious decision. How do you know which to choose?
Increase the value of your business
Chapter 7: Liquidation.
This type of bankruptcy is used when debts are just too overwhelming to come back from. It’s also used when a business has no assets, for example, if it is mainly skill-based and doesn’t have much physical property to offer. In Chapter 7, the court will give possession of the business’ assets to a trustee, who will distribute them to the creditors until debts are paid. Once liquidation is complete, the company will be released from debt obligation, which is called a “discharge.”
In this type, the company goes out of business. Bankruptcy will appear on the debtor’s credit report for 10 years, and they won’t be able to file Chapter 7 and receive debt discharge again within eight years.
Chapter 11: Reorganization.
If you think your business can turn things around, Chapter 11 is a good option. You’ll submit a reorganization plan that shows how you’ll change your business plan to repay your creditors. The court will approve the plan and appoint a trustee – which can be the owner, but not always.
Chapter 11 bankruptcy is very complex, takes a long time to move through the courts and is expensive. The repayment plan can be for long periods, even above 20 years. And after all that, it won’t necessarily succeed. But it does avoid you having to close your company – although filing Chapter 7 always remains an option. Public companies often choose Chapter 11 because it allows them a chance to become profitable again and to provide value to their shareholders.
Chapter 13: Personal bankruptcy
This type of business bankruptcy is for sole proprietorships only. This is one of the most common types of business, so we’ve included it here. Chapter 13 is similar to Chapter 11, but is for individuals rather than corporations. You’ll submit a repayment plan that shows how you’ll repay your debts, usually over a period of three to five years.
Many sole proprietors have personal assets combined with their business assets. In Chapter 7, some of your personal property is exempt from being sold, but not all. In Chapter 13, you can avoid losing your personal assets. Chapter 13 also allows more debt to be discharged than Chapter 11, and you can even apply for a Hardship Discharge to have your debts dismissed. Finally, it is also typically a faster and cheaper process than Chapter 11.
There is a limit on the amount of debt you can have under Chapter 13. You can’t have more than $1,184,200 of secured debt or $394,7255 of unsecured debt. If your debts are under this amount, Chapter 13 is a good choice. If they’re over, you’ll need to file Chapter 11 for Individuals.
What happens when a business files bankruptcy
Filing business bankruptcy is a federal process following the Bankruptcy Reform Act of 1978. The act created the U.S. Trustee Program, which oversees all bankruptcy cases. In any type of bankruptcy, a committee assigned by the Trustee will represent the company’s stockholders and credit lenders to ensure a fair outcome. Although it may not feel like it at the time, the ultimate goal of business bankruptcy is to help you find financial stability once again.
Chapter 7 bankruptcy is fairly straightforward: The Trustee is responsible for redistributing the assets to the creditors and overseeing the liquidation process. They run meetings between all the parties and ensure fair distribution.
Chapter 11 is a bit more complicated, as a reorganization plan must be developed and approved. In this case, the trustee will negotiate a reorganization or liquidation plan with the corporate entity. Typically, the company is given the chance to present a plan first; if the court finds it fair and legal under the Bankruptcy Code, the reorganization will proceed. If not, negotiations begin. The company can also allow the creditors to propose a plan. This process will run more smoothly if a plan can be made that stockholders, bondholders and creditors agree to; however, the courts have the final say.
In Chapter 7 and Chapter 11, creditors will be repaid first, because their loans are typically backed by the company’s assets. This allows them to make loans with little risk – they know they’ll be paid back one way or another. Bondholders are next, but they may only receive a small amount of what they paid.
Stockholders are not protected by federal business bankruptcy law. By purchasing stocks and becoming part owners, they knowingly assumed risk – they could become rich or they could lose money. (Big risk equals big reward, after all.) Therefore, they’re last in line to be repaid if bankruptcy is filed.
The company will be de-listed from Nasdaq and NYSE. However, those in Chapter 11 can still trade “over the counter” on the Pink Sheets (made up of companies too small to be listed or that don’t want to go public) or the Over the Counter Bulletin Board (OTCBB) (made up of struggling companies or those that don’t meet listing requirements). They won’t get much value for their stock, though. In Chapter 7, where you are liquidating your assets, your stock will not be worth anything and you’ll lose your investment. This is part of the risk – and thrill – of investing.
So what do stockholders get? They can report worthless investments as losses on their tax return, but that’s about it.
Chapter 13 works much the same way as Chapter 11, but because the company is a sole proprietorship, there are no negotiations needed with stakeholders. It’s usually a much faster process, and a repayment plan is laid out and approved by the court. The individual must then pay back any creditors. There are no bondholders or stockholders, and due to the debt limit, the payback process only takes three to five years.
Business bankruptcy doesn’t have to be complicated or embarrassing – in fact, it is relatively straightforward, and can even be a smart choice in many situations. Now that you know a bit more about the types of bankruptcies for businesses, it may be time to consider if it’s the right choice for you.
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