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Pros and Cons of Filing Business Bankruptcy

November 6, 2020

The past six months have wreaked havoc on our economy, particularly on small and medium-sized businesses. Some businesses are unable to remain open, with many hanging on by a thread. As a business owner, you may wonder whether you should file bankruptcy. While bankruptcy is typically considered one of the last resorts, it may be a necessary step. It is helpful to know some of the advantages and disadvantages of filing for bankruptcy.

Reasons to Consider Filing Business Bankruptcy

Your business might be drowning in debt and the future is uncertain. Although it may seem that you have no other alternative than to file bankruptcy, that is not necessarily the best option. The first step to deciding whether to file bankruptcy is to review your financial situation. If you are behind on payments or making only minimum payments, using credit cards to pay for business needs, and get regular calls from collection agencies, you may want to consider bankruptcy.

Types of Bankruptcy for Businesses

There are two main types of bankruptcy that could apply to businesses. Depending on your specific circumstances, you may be eligible for Chapter 7, or Chapter 11 bankruptcy. Sole proprietors may be able to file Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 is also called liquidation or straight bankruptcy. This type of bankruptcy allows a business to sell assets to satisfy creditors. Chapter 7 bankruptcy is a relatively short process, which may take less than six months. It allows you to discharge some of the debts that you cannot pay with assets that you sell. It is a good option for those who want to close the business completely because you can liquidate your business assets. It is important to know that if you personally guarantee debts, you will still be liable for them. With Chapter 7, your business will close.

Chapter 11 Bankruptcy

Chapter 11 is a plan for reorganization. It allows you to restructure your debt within a plan and timeframe that the court approves. Chapter 11 does not allow you to get discharge debt. You will still owe the debt that your business has accumulated. The most significant advantage of Chapter 11 is that you can continue with your business operations. Also, you may be able to renegotiate some of your debt. Chapter 11 can be complex and you will be under strict control of the court during the process.

Chapter 13 Bankruptcy

Chapter 13 is also known as personal bankruptcy. It is an option only for those who are sole proprietors of a business. This is a three or five-year procedure that allows you to make monthly payments through the trustee. Once complete, the entirety of the debt is discharged. If you have an LLC, corporation, or partnership, you cannot file this type of bankruptcy. Not all types of debts can be discharged under this plan.

Alternatives to Bankruptcy

There may be other options available to you, at least in the short-term. If you only have a few debts that you cannot pay, you may be able to negotiate with the creditors. Negotiation may allow you to reduce the debt, reduce the interest charges, or come to a better repayment arrangement. Sometimes, you might be able to extend the length of a loan to lower the monthly payments. If you have collateral on the loan, its value might have increased and therefore you may be able to reduce the balance on a secured loan. During this extraordinary time of the pandemic, creditors may be more apt to try to resolve a debt with you.

An experienced attorney will help you review your financial situation and provide you with alternatives to consider in your case. To learn more about bankruptcy, contact our legal team at Moen Sheehan Meyer, Ltd. online or by phone at (608) 784-8310.

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