Tips for Declaring Bankruptcy in the U.S.
No one wants to do it, but if your business is failing, sometimes filing for bankruptcy is the most financially sound decision possible. Read this guide to discover the how, why and when of bankruptcy.
Over 38,000 businesses filed for bankruptcy in 2017.
This is a larger number than most people assume. However, filing for bankruptcy is sometimes an inevitable decision for institutions.
What’s more, bankruptcy is not the equivalent of commercial doomsday. If filed correctly, it can actually enable business owners to create a fresh financial slate for .
If your business appears to be going under, it’s important to understand the elements of commercial bankruptcy.
Read on for insight into declaring bankruptcy as a business in the U.S.
What Does Declaring Bankruptcy Mean?
Business owners may file for bankruptcy for a variety of reasons. Most choose to do so upon deciding that the business has failed and is unable to proceed.
Businesses can fail due to changes in the economy, an unsuccessful business plan, shifting profit margins, or lack of product demand.
Business failure essentially means that operating the business in question is no longer a financially viable option.
In most cases, failed businesses don’t just vanish from the commercial scene. Many owners face unresolved debt and assets.
This is where bankruptcy comes in.
Declaring commercial bankruptcy enables a bankruptcy court to help business owners consolidate and/or eliminate remaining debt. Debt elimination often comes in the form of asset liquidation or reorganization.
There are three different types of bankruptcies available to business owners: Chapter 7 (liquidation), Chapter 11 (reorganization), and Chapter 13 (personal bankruptcy).
Steps to Filing Bankruptcy
Filing for bankruptcy is not necessarily a complex process. However, following some key steps can ensure that the process is as straightforward as possible.
1. Decide if Bankruptcy is the Right Decision
In some cases, declaring bankruptcy may not actually be the most financially sound decision.
Some business owners, for example, may be able to effectively manage outstanding debt by negotiating with creditors, consulting a business debt management counselor, or reaching out to an attorney.
If you own a variety of assets or have a savings account, these can contribute to debt elimination.
Some businesses may find success in transferring their product lines to a fully digital platform.
This can keep the business alive while reducing property management and employee costs.
Still, others manage to pay off debt through asset liquidation and return to ground zero. While this does not result in any profit, it can keep credit scores intact.
2. Choose Type of Bankruptcy
If you have decided that bankruptcy is the only solution, carefully select the type of commercial bankruptcy that suits your business.
Most business owners file for Chapter 7 or Chapter 11 bankruptcies. The former manages debt through asset liquidation. The latter eliminates debt via reorganization.
Chapter 7 bankruptcy is ideal for businesses that do not have substantial assets that can help restructure debt. Chapter 7 bankruptcies usually involve a hefty amount of accumulating debt and result in the dissolution of the business.
Chapter 11 bankruptcies are suited for businesses who are hoping to stay afloat in the future.
They involve a reorganization of debt, which results in structured payment plans to creditors over a long period of time.
Chapter 11 bankruptcies enable a business to stay in existence.
At the end of the day, choose your type of bankruptcy based off of total assets, nature of debt, and intentions for the future.
3. Complete Bankruptcy Documents
Filing for bankruptcy does involve an . Business owners have to submit a petition for bankruptcy, which includes their intention for filing.
Individuals filing for bankruptcy must also complete a host of documents called “schedules” that detail assets, income, expenses, codebtors, creditors, liabilities, and more. All of these forms are available for download at the United States Courts website.
These can feel tedious to complete; however, they are designed to give the bankruptcy court a holistic perspective on your financial situation. This is true regardless of what type of bankruptcy you are filing for.
When filing for Chapter 7 bankruptcy, business owners will likely have to undergo credit counseling prior to submission of their application. Credit counseling occurs with an approved agency and results in a certificate that must be attached to a bankruptcy petition.
There is a filing fee associated with declaring bankruptcy. These fees change annually, so it is important to check with your local court about current rates.
If you are unable to afford the filing fee, it is possible to apply for a fee waiver. This form is accessible via the United States Courts website.
4. Submit Your Petition
Many business owners are uncertain about where to actually file their bankruptcy petition.
Bankruptcy petitions are filed in federal, not state, court. You can find the federal court nearest to your location using the U.S. Courts’ locator. If you are unsure about which court to choose, we recommend selecting the one that is closest to where your business and/or assets are located.
It is possible to have your petition dismissed if there are errors. This is why it is essential to be meticulous in your completion of the appropriate documents.
5. Attend Creditors Meeting
About 20 to 40 days following the bankruptcy filing, you will have to appear in court for a creditors meeting. At this meeting, you will have to provide information under oath about your financial situation and petition to creditors and a trustee.
In most cases, this meeting lasts only a few minutes, and sometimes no creditors are present.
Following the creditors meeting, if no challenges are received, you will likely receive a discharge from debt obligations. However, some business owners will have to take care of a few more things prior to discharge.
This may include handing over any assets you aren’t entitled to, called nonexempt property. It may also mean starting payment on reorganized debt (if you’ve filed for Chapter 11 bankruptcy).
Following a discharge, a business owner has effectively filed for bankruptcy and can move forward with a new financial future.
For information about legal assistance in navigating bankruptcy, view here.
Declaring Bankruptcy as a Business Owner
Declaring bankruptcy does not have to be an overwhelming process. Prior to making your declaration, take some time to ensure that bankruptcy is the right financial decision to make.
If you’ve decided to move forward, select the type of bankruptcy ideal for your business based off of total assets, debt, and future intentions. Complete the appropriate documents and submit these to federal court.
Don’t forget to attend your creditors’ meeting and take care of additional items in order to receive a discharge.
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