Small Business bankruptcy laws are complicated and legal help is needed to sort these out. Even a small technical glitch can undo all the hard work that goes into the bankruptcy planning process. Business owners file for bankruptcy when their debts mount up and threaten to consume the business. The following scenarios can apply to such small business owners under bankruptcy laws:
i) When the business feels that it is unable to continue because its debt is so much that no reorganization or relief can help the business, then it can seek protection under Chapter 7. Such businesses feel the need to shut down all business operations completely. Under Chapter 7, a case trustee is appointed after the bankruptcy petition is filed.
The case trustee first determines the business assets that can be sold to pay off debts. Accordingly, a list of non-exempt assets is made and these are sold and their proceeds are utilized to repay the debt. After the Chapter 7 process is executed, the company ceases to exist. All forms of businesses – sole proprietorship, LLCs, partnerships – can file for bankruptcy under this Chapter.
ii) Some small business owners are so overwhelmed by debt that all their profits are eaten away by servicing debts and repaying the principal. Such businesses can get a new lease of life if they are given more time to repay their debts. These business owners can file for protection under Chapter 11 of Bankruptcy Laws. Chapter 11 helps businesses reorganize their debt and repay it over a period of time. The business owner files for bankruptcy under Chapter 11 and becomes a “debtor-in-possession.” He is required to act as a case trustee and get his reorganization plan approved by majority of his creditors.
Once the reorganization plan is approved, the business owner must ensure that he executes the plan to the last detail. Any negligence or variation in the execution can nullify the bankruptcy process. Business owners can continue doing their business and keep repaying their creditors under this Chapter, which helps small business owners stay in profits and also ensures that their creditors get what is rightfully owed to them. Protection under Chapter 7 is typically sought by corporations and partnerships. Sole proprietorships too can file for protection under this Chapter as well.
iii) Sole proprietorship firms can file for bankruptcy under Chapter 13. Chapter 13 allows small business owners to repay their debts out of their wages, and is referred to as wage-earner’s bankruptcy. It helps individuals protect their personal assets like a home or a car, and it also allows them to reschedule their mortgage repayments.
These are the Chapters that are relevant for small businesses in bankruptcy law.
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