If your business is struggling under increasing debt you might find yourself considering bankruptcy. There are three types of bankruptcy for you and your business – Chapter 7, Chapter 13 and Chapter 11. Your attorney can help you choose the right type, based on your circumstances and your long-term goals.
Bankruptcy should never be entered into lightly. It leaves a deep scar on your credit history and damages your reputation as a small business owner. This is a means of last resort to get out of debt.
Chapter 7 Bankruptcy in Arizona
Chapter 7, also known as “liquidation bankruptcy,” allows you to discharge your personal debts. The court will appoint a trustee who will oversee selling your assets and paying creditors. Individuals, partnerships, sole proprietorships, LLCs and corporations might be eligible to file Chapter 7 bankruptcy, depending on how much they owe and how much revenue they generate. They would choose this type of bankruptcy if they want to cease business operations.
If your business is a sole proprietorship, bankruptcy will eliminate debts owed to suppliers, accountants, consultants and other creditors. It will also discharge leases taken out by a sole proprietor, including your commercial lease and equipment leases.
This is certainly a drastic step for a business to take. Chapter 7 will result in you handing over the finalization of your company to the state of Arizona. You will cease operations, and the state bankruptcy court will liquidate your company and pay off creditors.
Chapter 13 Bankruptcy
Chapter 13 is an option for individuals who have regular income and sole proprietorships. Small businesses cannot file under Chapter 13 if they are run through corporations, partnerships or some other operating agreement. Chapter 13 allows you to restructure your business and continue operations – as long as you do not owe more than $1,149,525 in unsecured debt and $383,175 in secured debt (adjusted periodically to reflect changes in the consumer price index). The court will appoint a trustee, who will collect and disburse your payments to creditors. If you fail to make payments, the trustee can advise the court to force you into Chapter 7, which liquidates your assets and closes your doors.
Chapter 13 gives you the ability to pay back your debts in a time frame and at a rate that you can manage and to keep property as necessary. You business, your house and your car can all remain in your possession as long as you make your payments on time.
Chapter 11 Bankruptcy
Chapter 11 is not a favorite of small businesses because it involves a great deal of work and expense, but it might be preferred because it requires no time limit for debt settlement, which Chapter 13 requires.
If you can show that your company has a future and that restructuring and reorganization of debts is a viable option, Chapter 11 could give you the opportunity to rebuild and recover. You should understand, however, that Chapter 11 will take a significant investment in time and effort from you, your management and your attorney. It is a more expensive option than Chapter 7 or Chapter 13, but it may be worth it if you can come out on the other side with a healthy company.
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