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Even the most well-managed businesses can fall on hard times.
If you are facing significant business debt, you may consider filing for business bankruptcy — which doesn't always signal the end of your business. This section provides information for struggling businesses that are considering bankruptcy.
There are a number of bankruptcy options open to businesses, which are listed below. If you are unsure which type of bankruptcy is right for you, a good place to start is talking with a bankruptcy attorney.
Business Bankruptcy Options
Bankruptcy for Family Farms and Fisheries or Municipalities
Chapter 12 bankruptcy allows family farmers and fishermen to create a plan to repay their debts.
Insolvent public entities have the option to file for Chapter 9. This bankruptcy is similar to Chapter 13 but addresses the significantly different issues faced by municipalities.
Chapter 11 Bankruptcy
Consider this type of bankruptcy if you would like to stay in business and do not qualify for other related bankruptcy chapters.
In Chapter 11, your company becomes the "debtor in possession" with a right to retain its property. A "341 meeting" of creditors is held where disclosures are made about the company's financial position.
The United States Trustee may appoint a "creditor's committee," usually composed of the 7 largest unsecured creditors. A reorganization plan is developed that will provide for payment to creditors over a reasonable period of time. When the plan is confirmed by the court, the debts and liens not included in the plan are discharged.
Subchapter 5 in Chapter 11 is for small businesses that would like to reorganize under Chapter 11. It gives profitable but underwater small businesses a simplified process for paying their obligations.
Close or Reorganize Your Business
Consider Chapter 7 bankruptcy if you want to close your business. In Chapter 7, a trustee is appointed to take possession of the company's assets. A meeting of creditors is called that is referred to as a "341 meeting." At the meeting, you are asked about the company's assets, liabilities, income, and expenses. The assets are sold and the proceeds are distributed to the creditors.
Sole proprietorships that want to stay in business can reorganize through a Chapter 13 bankruptcy. A trustee is appointed but does not take possession of the company's assets. A "341 meeting" is held where the creditors examine the company's position. A plan must be filed within 15 days of the bankruptcy petition that devotes all of the debtor's disposable income to payments under a 3-5 year plan. Creditors do not vote on the plan. If the plan complies with the Bankruptcy code the court must confirm the plan. A discharge is granted when the debtor has completed payment on the plan.
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Contact a qualified bankruptcy planning attorney to find out your options.