Filing for business bankruptcy
“Business bankruptcy” isn’t a term anyone wants to think about, especially in regards to their own company. But did you know that filing for business bankruptcy can actually be a smart choice? Certain types of bankruptcies for business allow you to keep your business, while others relieve you from debt obligation. Companies like Kmart, United Airlines, Chrysler and Marvel Entertainment have all bounced back from bankruptcy. How does business bankruptcy work? It’s an important question to ask when you’re a business owner.
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. In addition to understanding what triggers many business owners to file for business bankruptcy, you’ll also want to get educated about different types of bankruptcies for business and the process of filing business bankruptcy.
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Situations where filing business bankruptcy makes sense
No one thinks about filing business bankruptcy when they’re making a profit and experiencing organic growth. In almost all cases, the prospect of bankruptcy arises because your business is having problems. You could be in the last phase of the business life cycle, referred to as the decline phase where you lose your competitive advantage and are ready to exit the market. Or you could have made mistakes during the startup phases of your business and have failed to find ways to generate profit or create a cohesive team.
Business bankruptcy is meant to protect your personal assets should your business fail or you are unable to pay your debts. At its core, filing for business bankruptcy allows you to put your mistakes behind you and focus on progress. Whether that progress involves starting another business, reinventing the business you currently have or leaving the world of entrepreneurship to find a career where you do what you love, you must view bankruptcy as a fresh start.
Types of bankruptcies for business
There are three types of business bankruptcies. Some only apply to certain types of businesses and have limits on the debt that is allowed. 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?
The first step is to focus on what you want to accomplish with the bankruptcy. Tony Robbins says your first decision in any situation is focus. Whether you want to pay off outstanding debts, increase the value of your business or cut your losses so you can start a new business, keeping the goal of business bankruptcy in mind is crucial for a successful outcome.
Here are the different types of bankruptcies for business and the situations where they apply.
Chapter 7: Liquidation.
This type of business 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.”
Pros: If you are ready to start a new business or explore other career options, Chapter 7 could fit the bill. Chapter 7 business bankruptcy allows you to eliminate most (if not all) of your unsecured debts, including medical bills, personal loans, payday loans, cash advance loans and credit card debt. Once you file for Chapter 7 bankruptcy, it typically takes about six months to receive your discharge.
Cons: In this type of business bankruptcy, the company goes out of business. A Chapter 7 discharge does not relieve certain debts, including mortgages and car loans, and it can also result in the loss of property if your equity is non-exempt. If you plan to reorganize and start your existing business anew, this is not the right type of business bankruptcy to file. A Chapter 7 bankruptcy will appear on your credit report for 10 years, and you 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 one of the different types of bankruptcies for business to consider. With Chapter 11, 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 to oversee it.
Pros: Filing business bankruptcy under Chapter 11 can help you avoid having to close your company – although filing Chapter 7 instead 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. When you obtain debt relief through a Chapter 11 claim, an automatic stay is put in place, meaning creditors cannot attempt to collect repayment during the term of the stay. Meanwhile, you’re able to create a reorganization plan to pay back debts and regain profitability, usually by renegotiating leases, contracts and other binding agreements. Creditors are often receptive to reorganization under a Chapter 11 business bankruptcy plan, since the payment they receive is more favorable than it would have been under Chapter 7. Since winning a Chapter 11 business bankruptcy discharge does not require selling your assets, if you believe you can make changes that will result in profitability, Chapter 11 could be your best bet.
Cons: Chapter 11 business bankruptcy is very complex, takes a long time to move through the courts and is expensive (i.e. higher filing fees and court costs). The repayment plan can be for long periods of time and can stretch to 20 years or more. And after all that, it won’t necessarily succeed.
Chapter 13: Personal bankruptcy
This type of business bankruptcy is for sole proprietorships only. Chapter 13 is similar to Chapter 11, but is for individuals rather than corporations. When you file for Chapter 13, you’ll submit a repayment plan that shows how you’ll repay your debts, usually over a period of three to five years.
Pros: Many sole proprietors have personal assets combined with their business assets. In Chapter 13, you can avoid losing your personal assets – versus Chapter 7 business bankruptcy, where some (but not all) of your personal property is exempt from being sold. 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. It is also typically a faster and cheaper process than Chapter 11.
Cons: It can take up to five years to repay your debts under a Chapter 13 business bankruptcy plan. Your debts are paid with your disposable income, so whatever extra cash you have is committed to debt repayment. If you obtain debt relief by filing business bankruptcy under Chapter 13, you’re barred from filing a Chapter 7 claim for six years. Chapter 13 cases remain on your credit report for 10 years.
Keep in mind that there is a limit on the amount of debt you can have if you file Chapter 13 for business bankruptcy. 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.
Business bankruptcy relief through the Small Business Reorganization Act of 2019 (SBRA)
The Small Business Reorganization Act of 2019 (SBRA) went into effect in February 2020. The legislation works to help small businesses reorganize their debts, expedite the process of filing business bankruptcy and reduce the fees attached to bankruptcy filings.
The SBRA is intended to benefit “small business debtors,” which the law defines as small companies with less than about $2.7 million in debts.
The SBRA streamlines the process of filing business bankruptcy in a number of ways, including shorter deadlines and greater flexibility negotiating debt restructuring plans.
Support from a private trustee
The SBRA is implemented by the Department of Justice’s U.S. Trustee Program (USTP), which appoints private trustees to work on behalf of indebted businesses. These trustees are vetted to provide a diverse set of business, accounting and legal skills. The USTP minimizes the need for costly litigation, ensures compliance with the Bankruptcy Code and quickens the resolution of bankruptcy claims.
What actually happens with these types of bankruptcies for business
Now that you know the different types of bankruptcies for business and situations in which bankruptcy is an option, let’s look closer at the process. Filing business bankruptcy is a federal process overseen by the U.S. Trustee Program. 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.
The Chapter 7 business bankruptcy process 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. You won’t have much control over the proceedings and, when it’s all said and done, you will be free to pursue your next project.
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 you. Typically, you are 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. You 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. You can be much more hands-on in this type of business bankruptcy as you will still retain control of your company when it’s finished. You can take the opportunity to reexamine your business plan and ensure your refreshed business is innovative and talkably different.
In Chapter 7 and Chapter 11 business bankruptcy, creditors will be repaid first because their loans are typically backed by your 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 and took the chance to become rich or lose money. This means they’re last in line to be repaid if business bankruptcy is filed. Publicly traded companies will be taken off the Nasdaq and New York Stock Exchange and, in the case of Chapter 7, stocks will lose all their value.
Chapter 13 works much the same way as Chapter 11 business bankruptcy, 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. You must then pay back any creditors, but since there are no bondholders or stockholders and the debt limit is lower, the payback process only takes three to five years.
Filing 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 business, it may be time to consider if it’s the right choice for you.
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