Filing for Bankruptcy to Close or Reorganize a Business

When financial difficulties go from bad to worse and the best solution is simply to start over, both individuals and companies can seek bankruptcy court protection.

They have a choice:

  • A liquidation bankruptcy: the discharge of debts means that all unsecured debts are wiped out when nonexempt assets are sold, or
  • A reorganization bankruptcy, which allows them to reorganize and repay a percentage of their debts in a bankruptcy court-approved repayment plan to two classes of creditors: secured and unsecured.

We’ll examine these two bankruptcy types and how they differ in the way they offer debt relief. Doing so should help you better understand which bankruptcy option may be best for you. 

Liquidation Bankruptcy: Chapter 7

Chapter 7 bankruptcy is the most common form of bankruptcy protection for both individuals and businesses. It is commonly referred to as liquidation bankruptcy because filers may have nonexempt assets taken by their bankruptcy trustee to help determine if there is enough to sell to pay creditors.

The bankruptcy trustee will decide how the money from the assets will be used to pay one of the classes of creditors: unsecured creditors. The bankruptcy trustee will also determine how much payment each will receive. All remaining debt is discharged, except for certain “nondischargeable” types such as child support, alimony, and student loans. 

The other class of creditors create secured debts. Many of those debts may be reaffirmed meaning you may get to keep the property if it is acceptable by statute or if the bankruptcy trustee and the creditors agree. An example of a secured debt is a vehicle that you need to go to work that you still make payments on. It may be considered exempt property. 

If the bankruptcy trustee finds that you have assets to pay at least some of your debts, a Chapter 7 may be converted to a Chapter 13. If they decide you have no assets to pay, your Chapter 7 may be converted to a no-asset case and none of the unsecured creditors will receive a payment. 

Are All Assets Sold in Chapter 7 Bankruptcy Cases?

No, not all assets are taken and sold in Chapter 7 bankruptcy cases. Exempt property does exist within the bankruptcy code. While bankruptcy code is federal law, each state also has some of its own regulations, such as what is considered exempt property. 

For example, your main home (if you are a homeowner or in the process of buying your home) is generally considered exempt property. That isn’t the only one, but for the sake of brevity, we are listing only one. 

What Is the Outcome for Chapter 7 Bankruptcy Cases?

Although both individuals and companies may file for Chapter 7 bankruptcy proceedings, the outcome is different for each one. With an individual, the discharge leaves them free to start over and rebuild their finances. With companies, the business is permanently dissolved once assets are liquidated and creditors receive the proceeds. 

Before a Chapter 7 bankruptcy case may be filed, the individual or the business must first meet certain eligibility requirements to be court-approved to be eligible to go through the entire process:

  • They must meet the median income requirements for their state and family size as set by the Department of Justice.
  • They must also not have received a bankruptcy discharge within the last eight years to file another Chapter 7.

However, once the discharge of debts is complete, the debtor gets a fresh start! To learn more about Chapter 7 bankruptcy, Bankruptcy Basics is offered by USCourts.gov

Reorganization Bankruptcy: Chapters 11, 12, and 13

Chapters 11, 12, and 13 bankruptcy proceedings are all regarded as reorganization bankruptcies, because those who file have the opportunity to restructure their debt payments to pay creditors over a certain length of time. 

A reorganization bankruptcy does not typically eliminate the debts themselves. Under bankruptcy code, debtors receive a 3-5 year repayment plan that makes their debt load more manageable. The payments are made directly to the bankruptcy trustee who then provides then pays creditors. This includes both secured debts and unsecured debts. 

How Reorganization Bankruptcy Is Different from Chapter 7

Unlike Chapter 7 bankruptcy proceedings, this type of bankruptcy protection means that you don’t generally give up any property to be sold. If you’re behind on the payments to your home or car (secured debts), you get the opportunity to catch up on them as well through your payment plan. 

Businesses that file for Chapters 11, 12, or 13 can usually continue to operate normally. So, reorganization bankruptcies are a preferred option for businesses who are temporarily struggling with financial difficulties but know that in the future they will be able to make their payments and remain on good terms with their creditors. 

How Are Payments Made in a Chapter 13 Bankruptcy?

In a Chapter 13 bankruptcy case and in other reorganization bankruptcies, one the payment plan is established and approved by the bankruptcy trustee, you will make the payment directly to the trustee. The trustee then makes the payment to the creditors. 

Once the terms of the repayment plan are satisfied, all unsecured debts are discharged. Under bankruptcy code, if the bankruptcy trustee finds that you are unable to make payments to your creditors, a reorganization bankruptcy may be converted to a Chapter 7 no-asset proceeding. 

What Is the Most Common Reorganization Bankruptcy?

Chapter 13 is the most commonly filed reorganization bankruptcy, with 297,500 non-business filings in 2017. Chapter 11 is another type that is primarily utilized by business entities, although individuals with a debt load that exceeds the limit for Chapter can file for Chapter 11 reorganization. 

Chapter 12 bankruptcy is not available to individual debtors—its purpose is to provide bankruptcy protection to businesses of a specific type, such as family farmers and fishermen. According to Reuters.com, farm bankruptcies were up by 20% in 2019.

Learning More about Reorganization Bankruptcy

Reorganization bankruptcy is quite different from liquidation bankruptcy. To learn more, read Bankruptcy Basics for reorganization bankruptcy. Bankruptcy Basics is offered for free by USCourts.gov.

Keep in mind that it is meant to explain the process of bankruptcy and that the federal courts cannot give you legal advice based on your specific circumstances. Their guide is only meant to help you understand how the bankruptcy process works so that you can make a better decision about which bankruptcy option is best for you. 

Learn More: Call B. David Sisson Now!

The best bankruptcy proceeding type for your situation depends on many factors unique to your life including your debt amount, your income, if you filed bankruptcy in the last few years, and whether you are filing as an individual or a business. Bankruptcy code can be hard to navigate on your own. For assistance in making the right choice for your circumstances, contact Attorney B. David Sisson for a no-obligation consultation today.