The Different Types of Bankruptcy Explained

Managing a business can be a real challenge, especially when it comes to the financial aspects. Handling the expenses and the different costs associated with the business can take its toll on your company’s coffers. Companies that need financial assistance can rely on lending institutions for debt to keep their business on its feet. However, the money that you will borrow may not last for a long time, and unless you can earn revenue, you may have to file for bankruptcy at some point.

While it can provide you with a temporary solution to keep your business afloat, struggling with debt can be an overwhelming situation that is hard to get out of. If you feel that you can no longer cope with the financial situation of your company, it may be time to consider bankruptcy. According to the American Bankruptcy Institute, over 33,000 businesses filed for bankruptcy in 2013. Other bankruptcy filing statistics can be found through the US Courts website. But what kind of bankruptcy are you going to apply for? Read on and find out about the different kinds of bankruptcy.

According to the website of Gagnon, Peacock & Vereeke, P.C., there are five kinds of bankruptcies that businesses can avail of. These types derive their name from their respective chapters in the United States Bankruptcy Code. They are dependent on several factors, including whether you are an individual or corporation.

Chapter 7 is the easiest method for paying out debts, but is designed for individuals, not businesses. This kind of bankruptcy requires the applicant to make less than their state’s median income for a household of your family’s size. With Chapter 7 bankruptcy, you sell all your non-exempt assets being held by the debtor in order to settle the debts to the fullest extent possible. Once the bankruptcy is over, your so-called “dischargeable debt” gets removed. This type of bankruptcy will take around four months to finish.

Chapter 11 bankruptcy is the most complicated type and is applicable to businesses. Here, you keep your business functioning, maintains all assets, and devise a plan to pay off the debt. In the past, a business used to have an unlimited amount of time for coming up with the reorganization and payment scheme. The Bankruptcy Abuse Prevention and Consumer Protection Act changed that to 120 days. If you are not able to submit the plan within the allotted period, the creditor can submit their own plan.

Chapter 12 bankruptcy is designed for farm owners. The business owner still has control while they work out a repayment plan with their creditors.

Chapter 13 is like Chapter 11 but the main difference is that it is designed for individuals. The owner also makes a 3 to 5 year repayment scheme. Depending on the income of the company, a percentage of the debt can be discharged.