Types of Bankruptcy for Small Businesses

The decision to file for bankruptcy is a difficult one, particularly for small business owners. When a business owner does make the decision to declare bankruptcy, the owner must then choose the type of bankruptcy to file. There are a few different types of bankruptcy for businesses, and each type has pros and cons.

Chapter 7 bankruptcy, or liquidation bankruptcy, is the most common. It is best for businesses that do not have substantial assets and that have no hope of repaying the debts. Through Chapter 7 bankruptcy, your business assets will be liquidated or sold to pay off outstanding debts. Any debts that are not covered by the assets will then be discharged.

Chapter 11 bankruptcy allows business to reorganize and continue operating. Typically, a debtor who files Chapter 11 bankruptcy will propose a plan to restructure the business and eliminate debt. Although Chapter 11 bankruptcy most often applies to corporations, it can also apply to small businesses and sole proprietorships. This type of bankruptcy is complex. As a result, it can be time-consuming and costly.

Chapter 13 bankruptcy is another type of bankruptcy. Because only individuals can file for Chapter 13 bankruptcy, it is usually reserved for consumers. It can, however, be used by small businesses that are owned by individuals, or sole proprietorships.  Declaring bankruptcy under Chapter 13 requires the debtor to propose a repayment plan to pay off the debt in installments over a period of three to five years.

Although Chapter 7, 11, and 13 bankruptcies are the most common types, there is another type: Chapter 12. Chapter 12 bankruptcy covers a very limited scope of businesses. It is designed for family farmers or fishermen who make a regular annual income. Similar to Chapter 13, Chapter 12 bankruptcy requires debtors to create a repayment plan to pay off debt.

If you are a small business owner in Ohio and are considering bankruptcy, you need as much information as possible. Filing for bankruptcy is a big decision that can have important consequences for you and your business. To learn more, consider speaking with an experienced bankruptcy attorney.

Source: SBA.gov, “Bankruptcy Options for the Small Business Owner,” Jennifer D., March 24, 2010