A struggling business can file one of four types of bankruptcy, and the choice will depend on the goal for the company. If the business is closing or already closed, you’ll likely file for Chapter 7 bankruptcy. If you’d like your business to remain open, choosing one of the three debt reorganization chapters—Chapter 11, 12, or 13—can help lower monthly debt obligations and get the company back on track.
Not all businesses can file every form, however. Here are brief descriptions of each chapter and the business entities that can utilize that particular type.
(For a discussion about entity types, read Who Can Authorize a Bankruptcy Filing on Behalf of a Business Entity?)
Chapter 7 bankruptcy. In this frequently filed chapter, the bankruptcy trustee—the court-appointed official tasked with administering the case—liquidates (sells) assets and distributes the proceeds to creditors. Any business can file for Chapter 7 bankruptcy, but only a sole proprietor can have qualifying debt wiped out (discharged). Also, it’s important to note that if the business is a sole proprietorship or a partnership, the personal assets of the sole proprietor or partners can be used to pay off business debt. (To find out about debt that survives Chapter 7 bankruptcy, read Will I Have to Pay Any of My Debts After Bankruptcy?)
Chapter 13 bankruptcy. In the right circumstances, a qualified business will be able to lower its monthly debt obligation and remain operational after filing for Chapter 13 bankruptcy. However, because the owner of the company’s personal finances get included in the reorganization plan, the chapter is only available to a sole proprietorship. Also, debt limits exist. If the total debt exceeds the amount allowed, the business (and owner) must file for Chapter 11 bankruptcy, instead.
Chapter 11 bankruptcy. Many companies that want to remain open opt for Chapter 11 bankruptcy. Once filed, the company will disclose its income, assets, and debt, and draft a reorganization plan that preserves critical business assets while reducing or eliminating certain debt so that the business can pay creditors out of the monthly profit. All business entities can file for Chapter 11 bankruptcy, and there are no debt limits. Even so, this chapter is used most effectively by larger, established companies. It’s often too costly for a small business with a limited income stream to gain the necessary approval from creditors and the court.
Chapter 12 bankruptcy. This type is similar to a Chapter 13 bankruptcy, but it’s only available to family farmers and fishermen. It allows a small farming or fishing enterprise to stay in business while affording relief through debt restructuring.
Filing for bankruptcy can have costly and irreversible consequences, and discussing all of them is well beyond the scope of this article. Before filing, it’s important to consult with a knowledgeable bankruptcy attorney about the particular needs of your business. To maximize the time spent at your appointment, read Bankruptcy: Preparing to Meet with a Lawyer.
Go to the main business bankruptcy FAQ page.