Business and Bankruptcy: What Chapter Do I Select?

Financial struggles are incredibly common in businesses, especially in 2020. And many entrepreneurs are overwhelmed by how they resolve these struggles. For some, bankruptcy might be the answer.

Depending on your situation, there is a chapter of bankruptcy that works for you and your specific business. You will want to choose the right chapter to maximize your benefits and also maintain your business (if that’s your goal).

When to choose Chapter 13

Chapter 13 bankruptcy focuses on reorganizing debts for individuals, so most businesses will not select chapter 13 as their option. However, if you are a sole proprietor of a business, you could apply for chapter 13 and repay your debts instead of liquidating your assets.

When to choose Chapter 7

Chapter 7 is the best option when your company does not have a future. The business would apply through chapter 7 and go through a “means test,” an eligibility test to determine if an applicant makes too much money for bankruptcy.

If the applicant passes, the business is dissolved. The company’s assets are distributed in court and the business owner is “discharged” of their debt at the end of the process. If you are in a partnership or corporation, you wouldn’t be eligible for discharge.

When to choose Chapter 11

If you want to revive your company, your best option is to file for chapter 11 bankruptcy. The benefits of chapter 11 include restructuring debts and negotiating new contracts or leases with your creditors. You assign a trustee to work with the court and come to a fair agreement that allows the company to pay off debt while maintaining operations.

Most business owners do not understand how flexible bankruptcy can be when it comes to chapter selection and the approaches you may take to address company debt. Before you select any chapter, confirm with an attorney and know you are making the best decision for your business.