Bankruptcy Law: New Laws for Chapter 7,11, 13

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The Small Business Bankruptcy Choice
Written by jessica Alba   
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small-business-bankruptcyThe economy is lousy.  Consumers are scaling back their spending to the simple necessities.  Banks are not giving the loans needed for day to day business. Costs are up and profits are down. Despite the best efforts to the contrary, there is only one option left.  You need to figure out the small business bankruptcy choice that is best for your circumstances.

If you are considering filing bankruptcy for your small business, do not try to do it yourself, or guess what you need to do.  In fact, as soon as you start experiencing financial trouble, contact a bankruptcy lawyer for learned advice and recommendations.  He/she will know all of the latest bankruptcy laws. 

Sometimes, it is even possible to avoid bankruptcy. If not, you will want to minimize the financial damage as much as possible.Depending on the size of your business and the debt involved, you basically have 3 different options in filing for bankruptcy:

1.    Chapter 7
2.    Chapter 13
3.    Chapter 11

Your bankruptcy lawyer will be able to advise you on the legalities of each type of bankruptcy, so that you can make an informed decision.

Chapter 7 Bankruptcy

Chapter 7 is probably the most commonly talked about financial second chance.  In fact, it is probably the option most people use, because they essentially want a clean slate.  By the time the business is on the verge of going under, the bills and money pressures are almost too much to bear.  The relief of a total bankruptcy is quite appealing, and usually the recommended option.

However, if you are the sole proprietor of your business, you need to understand how the law views your bankruptcy.   In the eyes of the court, you and your business are synonymous.   In other words, even if you have given your business a name, other than your own, the court will still see the process as one and the same.

Thus, chapter 7 bankruptcy for a small business of sole proprietorship is comparable to any personal bankruptcy. Most of your debts will be forgiven, and you will have a clean slate to get a fresh start.  Unfortunately, it will generally wreck havoc with your credit for the next 7-10 years.  So, if you decide to test your entrepreneurial spirit in the future, when the economy gets better, you may have a really tough time.

In addition, any personal loans you hope to get, in order to buy that newer car or a new home, will have a good chance of being turned down.  Even if you only filed for business bankruptcy, in the eyes of the law, your personal finances and business dealings are on and the same.

Chapter 13 Bankruptcy

Oftentimes, small businesses will go into chapter 13 bankruptcy, especially if there are partners involved.  Under chapter 13, the court will take into consideration all of the assets and liabilities, and then reduce the debt to a manageable amount.  In this way, at least the creditors will at least get some of the money owed.

Finances are then restructured to include a repayment plan set up by the court.  The proprietor(s) will then have 3-5 years to pay back the assigned debt.  Usually, this type of bankruptcy is implemented in order to give the owner(s) a chance to work things out, without having to totally lose the business.  Unfortunately, a lot of individuals later go back to court and have it changed to chapter 7 bankruptcy.

But, before you ever start your business with a partner, you need to be prepared, just in case you will need to file bankruptcy in the future. No one wants to think of their dream going bust, but it is always better to be safe than sorry. So, get EVERYTHING down on paper.  Foremost, how much has each partner sunk into the business. What are the responsibilities?  Who is going to be in charge of the finances?  Who will be responsible for the expense account for advertising or wining and dining potential investors?  It will be very important to know where to place accountability, if the business goes under.

As you can see, if you decide to file chapter 13 bankruptcy, you are going to need the professional services of a lawyer.  It would be foolish to try to meet the demands of the law on your own.  It could end up costing you even more in the end.

Chapter 11 Bankruptcy

Much like chapter 13, chapter 11 bankruptcy is meant to give the business a chance to restructure and save it from closing down.  However, this type of bankruptcy is more for the larger businesses or corporations.  One of the criteria is the amount of debt incurred.  It your business owes more than $260,525, you will probably be advised to file chapter 11.  However, if you have no alternative other than shutting the doors for good, you can always file chapter 7, no matter how much you owe.

So, now you know the basic differences between chapter 7, 11, and 13 bankruptcy.   You also know how important it is to keep a record of everything, and hire a bankruptcy lawyer, if worst comes to worst. You deserve to see a brighter future and get a fresh start, if needed.
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