Although businesses vary in terms of the products and services they offer, all of them need to make sales and increase their revenue to survive. If they make losses for extended periods, owners may be forced to file bankruptcy and close their doors or reorganize their enterprises. Profitability is the primary reason for bankruptcy filing among small businesses, but there are many other underlying factors that result in huge losses and bankruptcy.
Another primary reason for bankruptcy is unfavorable market conditions. During bust periods, consumer confidence declines, and this leads to low revenue. Many enterprises usually take loans to increase their operations. If they struggle, financial institutions may decline to offer more funds, resulting in bankruptcy.
COVID-19 has had an adverse impact on small businesses. Although the government issued forgivable loans worth hundreds of billions earlier this year, the companies see a financial storm coming fast. The Chamber of Commerce recently revealed that over 12 million small businesses could collapse by October. One of the options for such enterprises is filing bankruptcy. Here’s how you can do it:
Chapter 13 Bankruptcy
This type of bankruptcy involves reorganization and is usually reserved for individuals. It is a viable option for sole proprietorships since they are not separate legal entities. If you want to reorganize your debt instead of liquidation, the legal provision will work for you.
When it comes to Chapter 13 bankruptcy, you need to show a repayment plan and outline how you intend to repay your loans. The court will determine the amount you should pay based on your revenue, the amount of your debt, and the value of your properties. Chapter 13 bankruptcy will prevent the loss of personal property if you have a sole proprietorship.
Chapter 7 Bankruptcy
If you realize that your venture has no viable future, you need to file this type of bankruptcy. Filing Chapter 7 bankruptcy means the liquidation of your business. It is the best choice if your current debts are overwhelming, and restructuring them won’t be helpful. This option is meant for sole proprietorships, partnerships, and corporations that lack substantial assets.
Before a court approves Chapter 7 bankruptcy, it will review your income and any considerations your bankruptcy attorney puts forth. If it surpasses a certain level, your application will be declined. The approval of this type of bankruptcy leads to dissolution.
The court appoints a trustee who distributes the business assets among all creditors. Once the distribution of assets has been completed, the sole proprietor gets a “discharge.” This means they have been released from all obligations. There is no discharge for corporations and partnerships.
Chapter 11 Bankruptcy
If you think you can turn things around in your business, this is the ideal option. Usually, it is meant for corporations and partnerships. However, if a sole proprietorship has a lot of revenue, it can file for this type of bankruptcy. In this arrangement, a company reorganizes and continues operating under a trustee.
For Chapter 11 to be approved, a business must offer a detailed reorganizing plan and explain how it will repay the lenders. It allows enterprises to terminate contracts and recover some assets while discharging others to increase revenue.
Do You Need a Bankruptcy Attorney?
The process of filing for bankruptcy is not easy, and you need an expert who is updated about new legal provisions. Fair Fee Legal Services has reputable bankruptcy attorneys who will offer insights on the best type of bankruptcy for your business and enable you to navigate smoothly.
Fair Fee Legal Services
8665 South Eastern Avenue, Suite 101 Las Vegas, NV 89123