A Business in Overwhelming Debts: Which Bankruptcy Chapter is the Best Legal Option?

Posted by on Jun 20, 2014 in Business Concerns | 0 comments

Business firms, especially small and developing ones, are always faced with legal concerns that make operations and overcoming competitions and obstacles really challenging. Hiring the right (and competent) employees, employee benefits and compensation, purchasing better equipment for improved business operations, taxes, company debts and, sometimes, company losses – all these will have to be addressed, and on time too. But to remain competitive and to ensure the timely payments of all financial matters, business firms will have to have a steady flow of cash or should continuously make profit.

This is not the case with a slowed-down economy, though. And with not enough profit, a number of small, developing firms will find even keeping their heads above the water a much greater challenge. Some, which find the challenges simply overwhelming, decide to close, while others, in order to survive, apply for business loans until they lose control of financial matters and end up in debts too big for their company to settle.

While quitting at this time may already be too late, seeking legal advice may just be the means to solve all financial problems, with the chance of saving the company too. A business lawyer, for instance, can advise a company owner to solve his/her company’s overwhelming financial problems through legal means, that is, by filing a case of bankruptcy.

Bankruptcy, which is a federally authorized procedure, gives individuals and businesses the chance to regain control of their finances, while enabling creditors get some measure of repayment. The US bankruptcy law forgives debtors of their dischargeable debts, while allowing them to liquidate some assets or design a payment plan which will enable them to settle their debts that are non-dischargeable.

Through bankruptcy, business and individuals are given a fresh start. It is, however, necessary to determine which particular chapter of the US Bankruptcy Code ought to be filed for the debtor to enjoy the full benefits of the bankruptcy law.

The US Bankruptcy Code offers business firms, especially small ones, the option to file for Chapter 7, which is liquidation bankruptcy, Chapter 11 or business bankruptcy, or Chapter 13, also known as Repayment Plan or Debt Adjustment Plan.

For small businesses with no intent to continue operations, then Chapter 7 may be the appropriate legal option. Chapter 13 can be filed if the type of business is sole proprietorship (since this chapter can only be filed by individuals); thus, corporations, limited liability companies, and businesses owned by partners cannot file for this particular chapter. There is a cap, though, to the amount of loan, which an individual should not exceed, to be able to qualify for this chapter.

Owners of small firms that have intent of recovering can file for Chapter 11, which allows them to restructure their finances, modify payment terms or downsize by selling all or a part of their assets. Though Chapter 11 may help owners continue business operations, regain profitability, and balance their income and expenses, it is risky, expensive, complex and time-consuming.

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