One of the things that you must understand as a business owner or even as an individual is the different types of bankruptcy. Anyone and any entity can experience bankruptcy especially if they mismanage their finances.
Bankruptcy is something that everyone must avoid. Here are the different types of bankruptcy that a business or an individual can encounter. Understand each of them and do your best to avoid it from happening.
Chapter 7: Liquidation
Chapter 7 bankruptcy is the most common type of bankruptcy that every individual or business faced. It is also known as the liquidation or straight bankruptcy. Around 70% of bankruptcy filed in the US last 2020 is Chapter 7.
In the case of Chapter 7 Bankruptcy, the court will appoint a trustee. This trustee will oversee the liquidation of your business’ assets. The sale of the assets will be used to pay off the creditors.
A sole proprietorship business is the one that will benefit the most out of the Chapter 7 Bankruptcy. However, other businesses such as an LLC, partnership, or corporation won’t find Chapter 7 beneficial to their business.
Chapter 13: Reorganization
Filing for Chapter 13 bankruptcy will let you keep your assets while you reorganize and pay off a portion of your debts vis a repayment plan. The repayment plan in Chapter 13 commonly lasts from three to five years.
Once again, the court will appoint a trustee who will collect your monthly payments and oversee your case. The appointed trustee will be the one who pays the creditor according to the agreed repayment plan.
Your income and expenses will have a huge impact on how much you will pay back to the creditor. If you are earning more then you will be required to pay more. Nevertheless, you must also know that there are called priority debts that need to be paid in full regardless of your income.
Chapter 11: Business Reorganization
For businesses, Chapter 11 is the option for them if they want a reorganization. Before Chapter 11 is only filed by huge corporations but today, it has evolved that even small or large businesses can file it too.
Although Chapter 11 is more focused on business, individuals who do not qualify for Chapter 7 and 13 bankruptcy are also allowed to file for Chapter 11. This bankruptcy option lets a business regroup and re-strategize to revive the company.
When you file for Chapter 11, all collections on your business will stop including but not limited to payment requests, property seizure, eviction or foreclosure, and collections trial. It will also let you retain the ownership of the business unlike with chapter 7.
Chapter 11 bankruptcy aims to make a financial plan that you, the creditors along with the court agree. The agreement should enable the business to continue operating and prosper. The plan under Chapter 11 can have modifying payment due dates, interest and can even erase debt completely as long as it is agreed upon.
The difference between Chapter 13 and 11 is that Chapter 11 can be filed by both individuals and businesses with no required incomes and debt-level limits. Chapter 13 on the other hand, is for individuals who have a stable income and have debt limits.
Chapter 12: Family Farmers and Fishermen
The Chapter 12 bankruptcy is reserved for farmers and fishermen who want to reorganize their finances and pay off their debts. This will allow them to maintain ownership of their assets while they reorganize and pay off their debts.
Chapter 12 is also somewhat similar to Chapter 13 but with added benefits to the debtors. The case will begin when the debtor files the voluntary petition for relief. The debtor can still continue operations such as farming or fishing even after the bankruptcy is filed.
Although the court will appoint a trustee to oversee the case, his responsibilities will only be limited. The main responsibility of the trustee will just be monitoring the operations of the debtor, reviewing paperwork, collection, and disbursement of the payment, and notifying the court.
Chapter 15: Used in Foreign Cases
Chapter 15 bankruptcy is a new addition to the list of bankruptcies. It was added in 2005 to give cooperation between foreign and US courts. This allows foreign debtors to have access to the US bankruptcy courts.
The aim of Chapter 15 is to reduce the risk for stakeholders and creditors of companies outside the United States.
Chapter 9: Municipalities
This type of bankruptcy is only for municipalities that are financially distressed. Once a municipality files a Chapter 9 bankruptcy, it will give them protection from creditors through a plan created to resolve the municipality’s outstanding debts.
Federal bankruptcy courts only have limited jurisdiction over the Chapter 9 bankruptcy. Chapter 9 bankruptcy does not have a legal provision for liquidation of assets, unlike all the other bankruptcy chapters.
How to Deal With Bankruptcy
The best way to deal with a bankruptcy case is to hire a bankruptcy lawyer that will help you strategize. The lawyer will also help you oversee your case while you are busy reorganizing your finances. However, if you still did not experience bankruptcy, it is best to avoid it altogether.