4 Types of Business Bankruptcy (and How to Restructure)

paper petition for bankruptcy

As a business owner, there are very few things more unsettling to consider than shutting down your business or filing bankruptcy. The US Bureau of Labor Statistics (BLS) finds that 20% of new businesses fail during the first two years, 45% during the first five, and 65% during the first 10. Only 25% of new businesses make it to 15 years or older.

These are sobering statistics, to be certain. However, filing for bankruptcy does not necessarily have to spell the end of your business. Similarly, many businesses that do close never pursue bankruptcy. Typically, most businesses that file bankruptcy do so due to overwhelming debt. There is a bright side to all this: some businesses are able to save themselves by renegotiating untenable debt situations and essentially ‘starting fresh’.

What Is Business Restructuring?

Restructuring is the reorganization of your systems and debts in a new way to increase the efficiency of operations. Sometimes, this may include changing the original structure entirely. Restructuring could also mean adding or dissolving business units that do not necessarily affect the entire structure.

Under several bankruptcy chapters, you can reorganize your business and continue operations as usual. So, which kinds of bankruptcy allow and do not allow business restructuring? Below, we will explain the four types and how you can restructure accordingly.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is the most common type that corporations, partnerships, and sole proprietors choose when they have a realistic chance of getting back on track. This usually means the business or consumer has significant assets or a viable repayment plan that would convince the creditors and the court of a solid reorganization and repayment plan.

In fact, Chapter 11 is known for being the reorganization bankruptcy chapter. It gives business owners the opportunity to pay back the creditors over time, all while remaining open and continuing operations. Your bankruptcy lawyer would be able to walk you through this long-term plan, to make sure all the documents are submitted, to keep everything organized, and to prepare for court hearings.

The restructuring process for Chapter 11 bankruptcy includes the following:

  • The debtor submits assets, liabilities, balance sheets, reports showing profits and regular earnings, expenditures, contracts, and leases to the bankruptcy court as leverage for the reconstructing plan.
  • In the restructuring plan, the debtor describes how they are going to repay the creditors as well as meet other financial obligations such as payroll and other taxes.
  • The creditors review the plan and vote to approve it.
  • Then, the court can approve the restructuring plan, and the debtor can begin implementing it.
  • The debtor starts reorganizing the business by paying the creditors with the profits they continue to generate. The business owner can also renegotiate or void contracts that show a potential loss, sell off assets if necessary, and otherwise work to balance income and expenses.
  • Also, the debtor may be discharged of debts when the court has approved the reconstruction plan.

Chapter 7 Bankruptcy

On the other hand, if a business or sole proprietor does not show potential to survive, the debtor could file under Chapter 7 Bankruptcy. This type is known as liquidation. In this case, the business or individual has debts that can no longer be restructured, and they usually lack the assets to even begin the process.

Instead, the court appoints a trustee to convert the company assets or anything of value into cash, and then the money is distributed among the creditors. Also, under Chapter 7 bankruptcy, sole proprietors can be discharged of remaining liability on the debts. However, corporations and partnerships are not eligible for this discharge in a Chapter 7 case.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is known as the reorganization form for consumers and some sole proprietors. Under this type, individuals who earn a regular income can get on a repayment plan. The amount the individual would have to repay depends on their revenue, their debts, and property.

The restructuring process for Chapter 13 bankruptcy includes the following:

  • Similar to Chapter 11 bankruptcy, the debtor would have to get their repayment plan approved by the court. The business owner can also continue to operate while in repayment.
  • In contrast to Chapter 7, the individual does not have to hand over their property and assets to the trustee.
  • Once the court approves the repayment plan, the creditors can no longer pursue a lawsuit against the debtor, and the creditors have full protection.
  • The repayment plan can extend over several years.
  • After the reorganization plan is complete, the individual is discharged from all remaining debts.

Chapter 12 Bankruptcy

Chapter 12 Bankruptcy is an option available to small farming or fishing companies. Essentially, this bankruptcy type is a restructuring framework for these types of family businesses to avoid liquidation.

The restructuring process for Chapter 12 bankruptcy includes the following:

  • The business has 90 days to come up with a repayment plan, and sometimes the deadline can be extended.
  • The business owner can pay off their debts over 3 to 5 years.
  • Their businesses can continue operations as usual.
  • The court will appoint a trustee, but their duties are generally restricted to checking documents, monitoring the business operations, debt collection, and disbursing to the creditors.

Local Legal Representation For Bankruptcy

Each of the types of business bankruptcy carries with it its own set of challenges and complexities in terms of both determining whose business is eligible and what their course of action should be. However, bankruptcy is not a permanent stain on your credit score, nor is it a death sentence to every business. With the right legal representation by your side, you can decide upon the best bankruptcy option based on the needs of your business.

No matter the type of bankruptcy that your organization requires, a bankruptcy lawyer would help navigate, advise, and assist from the initial filing through the restructuring process. Our bankruptcy lawyers would be there to support and counsel on all procedures so that you can decrease financial risks and recover successfully. To discuss restructuring your business through a bankruptcy case, contact us today.

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