Though businesses aren't immune from the financial struggles that individuals and families face, they also have similar solutions. A business becomes bankrupt when its cash flow isn't enough to pay all the bills. While businesses have the option of filing for bankruptcy, sometimes business owners wait too long and an involuntary bankruptcy is forced upon them. Creditors can even impose a lien that forces business owners to make payments on assets. Fortunately, the negative effects of bankruptcy don't affect businesses nearly as much as individuals or families.
Regardless, business bankruptcy is a complicated process that takes owners away from the duties of running their business. Before considering a business bankruptcy, most business owners should:
· Negotiate with creditors to try to determine a different repayment plan that is manageable for business and its finances
· Discuss strategies with their CPA to determine if there are areas where costs can be cut and cash used more effectively
· See if they qualify for an emergency loan through the Small Business Administration
How to File for a Business Bankruptcy
Even if you take all the necessary precautions, it might not be enough to solve your business's financial quandaries. When filing for a business bankruptcy becomes the only option left, working with a bankruptcy attorney ensures that you correctly go through the process of filing and follow federal bankruptcy rules. With so many differences between a business bankruptcy and an individual one, not to mention the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the expertise of a bankruptcy attorney becomes a major asset for businesses.
To successfully file for bankruptcy, businesses must determine which option is best for them:
1. Chapter 7. Most businesses try to avoid a Chapter 7 bankruptcy, since this usually marks the end of the business. With this type of business bankruptcy, assets are liquidized and the funds used to pay back the debts of the business. The court appoints a trustee to administer the entire process and ensure that creditors are getting their fare share.
2.Chapter 11. With a Chapter 11 business bankruptcy, the organization is restructured to allow the company to continue operating. Both the court and creditors can be highly involved with how the business restructures itself for future growth and financial health.
3. Chapter 13. This option is usually limited to sole proprietors who individually want to protect their assets and ensure that they are protected from the business bankruptcy. Like Chapter 11, the business is restructured and the court reviews the reorganization plan.
How to Choose the Right Type of Bankruptcy
While Chapter 13 is clearly for sole proprietors, other businesses and organizations can struggle to determine which business bankruptcy option is right for them. Fortunately, a bankruptcy attorney can help determine if liquidation or reorganization is best. Typically, a bankruptcy attorney will suggest Chapter 7 if the business is not a major public corporation, doesn't have any foreseeable economic boost, has no intangible assets, and if the owner wants to close the business. However, a bankruptcy attorney might suggest Chapter 11 if the business can survive in the long-run.