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Bankruptcy for small businesses - Know your options

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by , 01-16-2013 at 09:51 AM (2968 Views)
If you are having major debt problems in your small business, then it is best that you address them immediately. many a times it happens that your business doesn't run successfully and you are unable to pay back the money to the debtors from whom you had borrowed initially. In such a case you should opt for bankruptcy. Depending upon the circumstances, there are three potential bankruptcy options that small businesses have. These are discussed in brief as follows.

Chapter 7 Bankruptcy - This kind of bankruptcy is meant for you if you do not have the provisions to restructure your debt obligations and continue with your business. For a Chapter 7 Bankruptcy, a trustee is appointed to you and all your available assets are sold. This fund is then used to pay back the creditors to the extent it is possible. The kinds of business that are eligible for filing a Chapter 7 Bankruptcy are Partnerships, Limited Liabilities Company and Corporation. Depending upon the income that you have, individuals who own the company and operate it as sole proprietorship can also file bankruptcy under Chapter 7.

Chapter 13 Bankruptcy - If you have a small business which you both own and operate, that is, it is a sole proprietorship, then you can go for a Chapter 13 Bankruptcy in order to restructure your small business. According to the laws of United States, only an individual has the right to file for a bankruptcy of Chapter 13, and hence this cannot be an option for partnerships, limited liabilities companies and corporations. The eligibility of Chapter 13 also depends upon debt limits. As per the current laws, an individual cannot file a Chapter 13 Bankruptcy is he or she woes an amount which is more than $360,475 as unsecured debt or an amount which is more than $1,081,400 as secured debt.

Chapter 11 Bankruptcy - The third option for small businesses to file for bankruptcy is Chapter 11. Usually small businesses don't go for Chapter 11 as it is expensive, risky, complex and takes a lot of time. However, for a small business Chapter 11 Bankruptcy is the only option if it wants to restructure its operations and continue and is owned by a partnership, limited liability company or a corporation. Also, Chapter 11 is the only way out for businesses owned by individuals who wants to reorganize their debts but owes too much money to meet the eligibility requirement of Chapter 13.
In this regard it can be said that Chapter 11 is one of the most important business bankruptcy option. Chapter 11 is a part of the United States Bankruptcy Code. Generally Chapter 11 comes into the picture when major enterprises such as General Motors, K-Mart and United Airlines have financial problems and they turn to bankruptcy courts for seeking assistance on debt. However, most cases of Chapter 11 Bankruptcy are filed by companies which are not well known and are not household names. Under Chapter 11 bankruptcy, a debtor can restructure its entire finances through a plan in which it reorganizes its operations and gets it approved by the bankruptcy court. By reducing the amount obligations and modifying the terms of payment a Chapter 11 plan will be and able to help a debtor balance its income and expenses and regain its profitability. thus a company can continue its operation in the market after regaining profitability through Chapter 11. Also, under Chapter 11, a debtor can sell some or all of its assets so that it can downsize it business if it is required or pay down the amount that it owes.
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