If you are closing a business due to bankruptcy, it is important to know your options. Eight out of every ten business owners will face serious financial problems at some point. Financial issues can occur for many reasons, whether it is the overall economy or a poorly conceived business strategy, there are really only 3 viable choices for a business when facing the financial crunch:
- Find a way to secure more financing
- Default on your loan
- File for a business bankruptcy
Going bankrupt is the simplest way to escape those relentless creditors, but it creates a red flag for your future financial endeavors and hurts your credibility as a business owner. Unfortunately this can lead to both business and personal issues down the road.
If you are closing a business and going bankrupt, you can file under one of three chapters of bankruptcy - Chapter 7, Chapter 11, or Chapter 13. In some cases your business must shut down during bankruptcy, while in other cases your business may remain open. Bankruptcy may be a way to get out of an oppressive lease and provides an orderly way for closing a business. While it can create a black mark on your credit score, filing for bankruptcy does not stop you from trying again and starting a new business in the future.
The following are the different types of bankruptcy and how they could apply to you if you are closing a business:
Chapter 7 This chapter is available for those businesses that are closing permanently. Although valuable assets may be liquidated and used to pay off the debt, this chapter of bankruptcy releases the filers from any obligation to pay. Chapter 7 is available to any type of business.
Chapter 11 Since corporations do not qualify for a Chapter 13, Chapter 11 is available, allowing businesses to reorganize debts and gradually pay them off. Businesses can even remain open during the bankruptcy process while they pay off their debts, and have 6 years to do so. Chapter 11 is available to any business, including corporations.
Chapter 13 Sole proprietors can file for Chapter 13, although they must file as individuals with business debts for which they are personally liable. Upon filing, an automatic stay is initiated, which prohibits the creditors from making any attempt to collect their debt, including starting foreclosure and repossession. Corporations may not file for Chapter 13.
You may have to close your business down if you file for Chapter 7 personal bankruptcy. However, you may be able to keep your doors open if you own an LLC or corporation with the other Chapters, even if you’re liable for a significant portion of its debt.
Even though bankruptcy is federal law, and most states have similar procedures on handling bankruptcy, bankruptcy filing law differs from state to state.This is why it is a good idea to always consult with a bankruptcy attorney from the state where your case is taking place.
The lawyers at Chang & Carlin, LLP are sensitive to the difficult decision you may be facing and are here to help you through this tough financial and personal time in your life. If you are considering closing a business and going bankrupt, let us help you determine what your options are and create a road map to guide you through the process of getting the best results possible for you and your business.
DISCLAIMER: All information on this website are provided for informational purposes only and are not intended to be construed as legal advice. Chang & Carlin shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.
