When a company begins struggling, the organization could be at risk. In some cases, business owners might even face financial liability if they do not respond appropriately to the company’s struggles. Many times, those contemplating business bankruptcy choose a Chapter 7, 11 or 13 filing, although there are other options available as well.
How can business leaders decide what type of bankruptcy is best?
Consider the goal of the filing
Chapter 7 or liquidation bankruptcy is typically the best option for those preparing for organizational dissolution. When the company has failed, a Chapter 7 filing allows for the discharge of eligible unsecured debts. The business may need to liquidate assets to repay what it can to creditors before eliminating debts through the discharge process and closing down entirely.
In a Chapter 11 bankruptcy, asset liquidation is not always necessary. The filer proposed a plan for restructuring, which might include the elimination of certain facilities, products or services. They work to reduce expenses to return the company to profitability.
In a Chapter 13 filing, the owner reports the company’s debts and assets. They negotiate a payment plan and make major changes to how the company functions in an effort to prevent the failure of the business.
Chapter 11 or 13 bankruptcy can be valuable for those whose companies grew too fast or for those who must pivot to address changing market conditions. Chapter 7 helps in cases where organizational dissolution is the plan.
Reviewing company finances with a skilled legal team can help business leaders determine what type of bankruptcy might be the best option given their goals. Those with support throughout the small business bankruptcy process can reduce their risk of operational disruptions and/or dismissed filings.