Many homeowners and small-business owners struggle to keep their homes and businesses afloat despite the economic recovery.
Businesses and individuals file bankruptcy to stop creditors from pursuing them and to discharge debts. The bankruptcy laws are based on the idea of a “stay”, or an order to keep creditors away while the debtor seeks relief. A “discharge” is the forgiveness or discharge of debt.
There are generally three types of bankruptcy. It can be difficult to decide which bankruptcy type is right for your company. A bankruptcy attorney should help you. Chapter 11 bankruptcy may be used to “reorganize” or “liquidate” individuals with significant income and large debts. However, it is mostly used to reorganize businesses. Chapter 11 is intended to assist businesses whose cash flow has been affected by debts. Chapter 11 bankruptcy can help restructure those debts and reduce the principal and interest rates of most secured and unsecured debt.
Chapter 11 bankruptcy filings are more stringent than any other type. Chapter 11 debtors must have current liability insurance for all their facilities. Also, the debtor must have adequate insurance for equipment and inventory. The court must receive many items at the start of the case. The United States Trustee oversees Chapter 11 cases and the debtor must submit detailed monthly operating reports. The filing of a Chapter 11 case is expensive and time-consuming. Small business owners are therefore not able to afford it. Many small business owners can’t afford to pay an attorney and go through the Chapter 11 process. There may be another type of bankruptcy that can help the individual and the company.
Most business owners who own “Mom and Pop Shops” in America think Chapter 11 is impossible. This is because most people associate bankruptcy with General Motors’ Chapter 11 bankruptcy. There may be other options for Mom and Pop Shop owners. Chapter 7 bankruptcy can be referred to as a “straight” (or “liquidation”) bankruptcy. The debtor is usually able to keep most of his or all of his property and will be freed from any of his debts. Businesses can also file Chapter 7 bankruptcy. A Chapter 7 bankruptcy is similar to the “fat lady singing at opera”. A business might file a Chapter 7 to notify creditors that it is closing down and stop any lawsuits. A Chapter 7 for a business is often followed by an individual bankruptcy in order to protect any personal guarantees that the business owner may have.
Chapter 13 bankruptcy is referred to as “rehabilitation” rather than “liquidation” because the debtor commits to repaying creditors in full or partial over three to five year periods. According to the Bankruptcy Code, a corporation or L.L.C. cannot file for Chapter 13 bankruptcy. Chapter 13 bankruptcy cannot be filed, but the owners or principals of the business can file for Chapter 13 bankruptcy and continue to manage the business while restructuring their personal debt. Many people who own Mom and Pop Shops finance their business with personal credit cards. These cards do not count as debt that the business has incurred. The debtor can file an individual Chapter 13 in order to restructure his personal debts and possibly the debt incurred by the business while they are still running the business. The business’s debt will be restructured without it having to file bankruptcy. If an individual files Chapter 13 bankruptcy, the business they own is still liable for the debts. However, the individual debtor should be exempted from any personal guarantees if the bankruptcy is successful.
A Chapter 13 bankruptcy is simpler, cheaper, and has fewer requirements than a Chapter 11 bankruptcy. Many business owners own companies that are too large to be eligible for this type of rehabilitation. They must file a Chapter 11 for business to restructure their debts and allow them to continue operating. There are many factors that affect the choice of which chapter a company should file under. A bankruptcy attorney should be consulted to discuss all options. Good information is key to making good decisions. There may be some light at the end.
This post was written by Trey Wright, a highly sought after bankruptcy lawyer in Valdosta, GA! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.
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