A business declaring bankruptcy is often synonymous with failure. However, that is a misconception.
Used properly, filing for bankruptcy can help a business to recover, grow and prosper.
A strategic tool
Bankruptcy is a legal process that enables individuals or businesses to restructure or discharge their debts when they are experiencing difficulties meeting their financial obligations. There are three types of bankruptcy commonly used by businesses:
Chapter 7, often referred to as a “liquidation bankruptcy,” involves ceasing operations, selling off business assets and using the proceeds to pay creditors. Other eligible debts are discharged. Chapter 7 bankruptcy is typically used when a company’s debts far exceed its assets, and there is no viable path to profitability.
Chapter 11 bankruptcy is commonly referred to as the “reorganization bankruptcy.” This is a suitable option for businesses with the potential for success, as it enables the company to continue operations while restructuring its debts under a court-approved plan.
Chapter 13 is similar to Chapter 11, but it is only for sole proprietors. If the individual has a steady income, they can repay the debt through a structured plan over a three- to five-year period.
Here is how filing for bankruptcy can be a useful tool and potentially help your business:
- It provides relief from overwhelming debt.
- An automatic stay goes into effect, which pauses creditors’ collection efforts, including lawsuits, wage garnishment and harassing phone calls.
- It protects certain business assets from liquidation, allowing you to keep the business running.
- It provides an opportunity to restructure your business and renegotiate payment terms with creditors, allowing your company to regain stability over time.
Bankruptcy can be a powerful tool for business owners facing financial hardship. Still, it’s a decision that needs careful consideration. Bankruptcy law can be complex. Hence, you need a legal representative to guide you through the process and help you weigh the pros and cons specific to your situation.