Chapter and Verse: Which Chapter of Bankruptcy is Best for Your Business? Skip to main content

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Chapter and Verse: Which Chapter of Bankruptcy is Best for Your Business?


You don't have to be Chrysler or GM to consider bankruptcy. Maybe you are a small business owner with just a few employees and are struggling to keep everyone on the payroll while you fight off creditors, waiting for the next big contract to come through. You're not alone. Here are the things you might consider as you look down the road.

This article assumes you've exhausted your credit and financial resources and are considering bankruptcy. Your best option when considering bankruptcy is to consult with a qualified bankruptcy attorney who can counsel you on your specific situation. You may find that bankruptcy is not the best move for you, but a qualified attorney will help you make that decision.

There are several different kinds of bankruptcy which may come in to play for you, as a small business owner. Here is a brief overview.

Chapter 7 Bankruptcy:
This is sometimes called "straight bankruptcy," as it is what most people associate with the term "bankruptcy" comes up. Depending on which set of exemptions are available to you under state or federal law, there is often a lengthy list of items of property which you can exempt from liquidation when you file for Chapter 7 bankruptcy.  However, if there are any assets outside of your available exemptions, the Chapter 7 trustee will likely seize and sell that property and distribute the resulting proceeds amongst your unsecured creditors.

Chapter 11 Bankruptcy:
You may have heard of a company that goes into "reorganizational bankruptcy."  Most often, this refers to Chapter 11 bankruptcy. Although this type of bankruptcy is often used by large corporations, small business may also file for protection under Chapter 11. As with the other forms of bankruptcy, certain rules and qualifications apply which may not make Chapter 11 a proper fit for your business's needs.

Chapter 12 Bankruptcy:
If your business is a family farm, or a family fishing business, Chapter 12 bankruptcy may be your best option. Chapter 12 is tailored to the special conditions that come from individuals, families or small businesses which make their living from the land, streams or sea.

Chapter 13 Bankruptcy:
You may consider Chapter 13 bankruptcy if your business is just yourself, or if your business is unincorporated and operates as a sole proprietorship.  As with personal Chapter 13 bankruptcy, this process gives you a chance to reorganize and repay many of your debts under court protection, rather than wiping debts clear from your books.  Under some circumstances, you may not have to pay any of your unsecured debt.  Only an experienced bankruptcy attorney can properly advise you on your particular set of circumstances. Chapter 13 stops the clock on debt collection while you make progress to get back on your financial feet by paying a monthly amount as part of your Chapter 13 personal reorganization.

As with any major decision in your personal or professional life, you should consult with an attorney who is an expert in bankruptcy before moving ahead. A qualified bankruptcy attorney will give you sound advice on whether or not bankruptcy is the right choice for you, and under which of the various chapters of bankruptcy you should file for protection from your creditors.

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