The 3 different types of bankruptcy that a business can file

Just like individuals swimming in debt may choose to file for bankruptcy as a way to alleviate their financial pressures, businesses often do the same. They may file for Chapter 7, 11 or 13 bankruptcy depending on how they’re incorporated, the assets and debts they have and whether they’re looking to remain in business.

Chapter 13 bankruptcy

Individuals that incorporate themselves as sole proprietorships often choose to file Chapter 13 bankruptcy. Although doing so allows them to hold on to their assets, they’re required to spend the three to five years afterward paying off their debts. How much must be repaid and at what intervals are contingent upon the debtor’s income and how much is owed.

Chapter 11 bankruptcy

This is perhaps the most common type of bankruptcy filed by businesses. It also happens to be the most complex type to file. Like those filing for a Chapter 13 bankruptcy, those pursuing a Chapter 11 continue to hold on to their assets while they pay their creditors back as part of a reorganization plan.

Unlike Chapter 13 bankruptcy, debts aren’t discharged, but instead, renegotiated. This means that lower interest rates may apply for a longer period of time or the repayment period during which a debt can be paid may be extended.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 gives filers 120 days to come up with a repayment plan on their own. If they don’t, then the creditor can create it instead.

Chapter 7 bankruptcy

Sole proprietors and other owners of small businesses who have few to no assets and little prospect of turning a profit in the future often file Chapter 7 bankruptcy. By doing so, any and all the company’s assets end up getting sold and applied to outstanding debts. Any remaining debts may be discharged.

By filing Chapter 7 bankruptcy, it essentially dissolves the business. Companies wishing to remain in operation should consider filing for a different type of bankruptcy instead.

Much like filing a personal bankruptcy, a business bankruptcy will remain on a credit report for as long as 10 years. This can make acquiring new office space, equipment and loans impossible. An Oshkosh business law attorney can advise you as to what alternatives to filing for bankruptcy exist.