3 Types of Business Bankruptcies

While it is common to hear that most businesses fail, some people do not consider what comes next. For many, the best course of action is going through bankruptcy. Through this legal process, business owners can often find financial relief after a company begins to struggle. If your business is in a tough spot and you are considering this route, it is good to have a thorough understanding of what to expect. When a business is dealing with excessive debt, there are three options. Read on to learn more about them.

1. Liquidation

Depending on your financial situation and legal structure, a business bankruptcy lawyer Columbia MD may suggest filing for Chapter 7. With this kind of bankruptcy, a business can expect to eliminate most of its debts, and in turn, liquidate most assets. If you are considering this route, think about where you see your company going forward. Does it look like there is potential to have some kind of future? If so, this may not be the best option. While some corporations file Chapter 7 and survive, many others do not.

2. Business Reorganization

Another option business owners have is filing for Chapter 11. For those facing financial problems but not necessarily the end of their business, this can be a good option. As the most common form of business bankruptcy, you can expect to create a business reorganization plan with Chapter 11. One thing to consider: The plan will need to benefit creditors rather than your business. After the courts approve a repayment plan, you will may payments toward your debts over a specified period of time. 

3. Adjustment of Debts

A third, less common option some businesses have is adjusting debts through Chapter 13. Although there are businesses that might qualify for this route under individual tax codes, most do not. Typically, individuals are the only ones who qualify for Chapter 13. The only way for you to include business assets under Chapter 13 is if you run your business as a sole proprietor. In these situations, business owners may file for Chapter 13 as a way to prevent loss of personal assets since the property between the business and individual is otherwise indistinguishable. 

When a business is struggling to stay afloat, it can be difficult to figure out what to do next. The good news is, there are different debt relief solutions available for a variety of situations. You can use this guide to help you figure out what your company might need to do.