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Business Bankruptcy: How to File, What to Do, and How it Works

  • There are four types of business bankruptcy: Chapter 7, Chapter 11, Chapter 13, and Chapter 12.
  • Preparation is essential before filing for bankruptcy; documentation, including financial statements and creditor lists, must be filed with a court-appointed trustee.
  • An “automatic stay” goes into effect after you’ve filed your petition, which protects the business from creditors.
  • A creditors’ meeting will be held within 20 to 40 days of filing, and a repayment or liquidation plan must be submitted for resolution.
  • Filing for bankruptcy is an extreme form of debt relief and should only be done when all other options have been explored.

Financial crises can befall anyone, and businesses are no exception. Entrepreneurs put their heart and soul into their businesses, but sometimes unforeseen events can affect their financials. You might consider filing for bankruptcy if you’re experiencing financial risks and overwhelming debt.

Although it might seem like a scary decision to make, it is a legal solution that can help you get a fresh start. This article will discuss filing for business bankruptcy, what you need to do, and how it works.

Types of business bankruptcy

If your business is struggling financially, it may be time to consider filing for bankruptcy. Bankruptcy can give you a fresh start and help you rebuild your business. However, before you file for bankruptcy, you must know about the different types of business bankruptcy and how they work.

Chapter 7

Chapter 7 bankruptcy or liquidation is the most common type for small businesses. In Chapter 7, the business assets are sold off by a trustee. The proceeds from the sale are then distributed to the business creditors.

Business owners can use the exemptions in the law to protect some of their assets from liquidation. The disadvantage of Chapter 7 is that the business will no longer exist after the bankruptcy process is complete. It is important to note that only sole proprietors, partnerships, and limited liability companies (LLCs) are eligible to file for Chapter 7.

Chapter 11

Chapter 11 bankruptcy is a reorganization bankruptcy typically used by larger businesses. In Chapter 11, the business continues to operate but is under the court’s supervision. The business owner acts as a debtor-in-possession, meaning they retain control of business operations during bankruptcy.

The court may require the business to submit a reorganization plan outlining how it intends to reorganize and pay off its debts. The disadvantage of Chapter 11 is that it is expensive and complicated.

Chapter 13

lawyer explaining options to a business owner

Chapter 13 bankruptcy is only available to sole proprietors. In Chapter 13, the business owner submits a plan to pay off some or all of the business debts over three to five years. Once the payments are complete, the business debts are discharged, and the business owner can continue to operate. The disadvantage of Chapter 13 is that it is only available to sole proprietors.

Chapter 12

Chapter 12 bankruptcy is similar to Chapter 13 but only available to family farmers and fishermen. Chapter 12 is designed to help these businesses reorganize and pay off their debts.

Preparation and Legal Help

Once you have determined the appropriate bankruptcy type, you must prepare all necessary documentation, including financial statements, tax returns, and creditor lists. The first step when filing for bankruptcy is to file a “bankruptcy petition” with a court-appointed bankruptcy trustee; doing so will initiate the process.

Another important factor when preparing for bankruptcy is to seek the help of a reputable attorney. Bankruptcy laws can be complicated and overwhelming, so having legal support or advice from an experienced attorney is essential for any business owner considering bankruptcy.

Automatic Stay

Once you’ve filed a bankruptcy petition, an “automatic stay” protects your business from creditors. This means that creditors won’t be able to collect payment, seize assets or initiate lawsuits against your business until the bankruptcy case is resolved. However, it’s important to note that the automatic stay does not apply to certain types of debts, such as taxes.

Creditors’ Meeting

Within 20 to 40 days of filing, a “creditors’ meeting” meeting will be held. At this meeting, you’ll meet your appointed trustee, and your creditors can ask you questions about your financial situation.


corporate meeting business people

Finally, after the creditors’ meeting, you must develop and submit a repayment or liquidation plan. The method you choose depends on the type of bankruptcy you filed for and the amount and type of debt you have. Once your cases are resolved, either through selling assets or negotiation with creditors, you will receive a discharge notice, which means that your debts are erased, and you can begin anew.

Final Thoughts

Hopefully, this article has given you an insight into the filing process for business bankruptcy. Remember, filing for bankruptcy is an extreme form of debt relief, so it’s best to explore your options before making such a decision.

However, if this is the route you choose to take, it’s crucial to understand the process to help you get through it smoothly. Financial crises can be challenging and overwhelming, but with expert legal advice and proper preparation, you can be a winner.

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