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Business Bankruptcy: Which Type Is Best for You?

By Brett Snider, Esq. | Last updated on

New companies don't always become roaring financial successes. Unfortunately for many small businesses, bankruptcy will be a reality.

Take heart, small business owner, there are several ways in which a company can declare bankruptcy. Depending on your company's financial situation, knowing the differences can help you get your business up and running again.

Which type of bankruptcy will work best for your business? Here's a general overview:

Chapter 7 Bankruptcy

Numerically, and possibly also logically, the first to consider is Chapter 7 bankruptcy, also referred to as liquidation.

As the latter name implies, Chapter 7 bankruptcy serves to liquidate a business' assets in order to remove all debt in exchange for a lasting mark on its credit, making this a decent option for sole proprietors and small business owners who have no qualms about closing up shop for good.

It is also possible that a small business that goes into Chapter 7 bankruptcy could get a second chance to salvage the business, according to Fox Business -- assuming the assets put up for sale by the bankruptcy are unsold and eventually bought back by you.

A debtor must be under a certain median income to qualify for Chapter 7 bankruptcy, which is why many companies facing bankruptcy consider Chapter 11 or 13 instead.

Chapter 11 Bankruptcy

If your business is too large to qualify for Chapter 7 and you don't plan on folding just yet, then Chapter 11 provides the opportunity to hold off creditors and form a new plan to pay off your debts.

While this is usually the path taken by larger corporations who are able to prove to the bankruptcy court that they have a chance of profitability post-bankruptcy, small businesses can still qualify for Chapter 11.

Chapter 11 is also far more costly than other bankruptcy options, so a failing business may not want to burn $10,000 to $50,000 on legal fees when it is already deep in debt.

Chapter 13 Bankruptcy

The last common chapter of our bankruptcy narrative is Chapter 13, also known as reorganization.

Unlike Chapter 7, Chapter 13 does not require the liquidation of company assets in order to satisfy debts. Instead, a reorganization bankruptcy creates a structured repayment plan which the business must meet on a certain schedule based on its income.

Unfortunately this option is only available to sole proprietors, or married couples who did not form a separate legal entity for their business, and a business owner must file for Chapter 13 in her own name, not in the name of her company.

Choosing a form of bankruptcy that fits your needs as a business owner, small or large, will open doors for your next business venture or even a second try at the first one. To learn more about which type of bankruptcy is best for your company, consider speaking with an experienced bankruptcy lawyer near you.

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