I spoke with experienced Philadelphia bankruptcy attorney David Offen, Esq. who let me know about some general pros and cons of filing bankruptcy for a business. If your business is struggling and you are considering filing for Chapter 7, Chapter 11, or Chapter 13 bankruptcy protection, read on to find out how each type of filing will affect you and your business.

The Pros and Cons of Chapter 7 Business Filing

First, what is Chapter 7 business bankruptcy?

Chapter 7 for businesses is a four to six-month liquidation process by which a business filing bankruptcy discloses all of its income, assets, debts, and expenses and the “automatic stay” is in place, meaning, creditors can take no action to collect debt from that business.

When the court and Chapter 7 Trustee find from the information filed that the business cannot continue to operate and meet its financial obligations, the business’ assets are liquidated for the benefit of its creditors. The business is then discharged of any debt in excess of the value of its assets, and the business ceases operations.

Corporations, certain LLCs, and sole proprietorships can file under chapter 7.

The Pros of Chapter 7 Business Filing

• Clean ending of the business
• Discharge of debt to creditors in excess of value of assets
• Sole proprietors and certain LLCs, owners are also discharged of business debt
• Continuing obligations like pension payments can be discharged

The Cons of Chapter 7 Business Filing

• Business cannot continue to operate
• Where multiple owners, if any individual owner personally guaranteed business debt, s/he is still liable
• if an owner borrows against their home to fund their business they are still liable
• Creditors frequently object to discharge or to sale of assets
• Partnerships can’t file Chapter 7

The Pros and Cons of Chapter 11 Filing

First, what is Chapter 11 Business Bankruptcy?

Chapter 11 is a reorganization plan by which a business’s financial obligations are adjusted and the business continues operations. The Chapter 11 Trustee, a committee of creditors, and the owner oversee the case and continuing operations. The business filing bankruptcy files a reorganization plan and renegotiates debt and contracts with creditors and vendors.

Partnerships, corporations, and certain LLCs in some states can file under Chapter 11.

The Pros of Chapter 11 Business Filing

• Business continues operations
• Business negotiates with creditors and vendors to reach a compromise
• There is no debt ceiling
• There are special “small business debtor” procedural rules that are somewhat relaxed

The Cons of Chapter 11 Business Filing

• Creditors and vendors don’t always cooperate
• It is a long, intense, and often complex process depending upon the size of business
• It is not always successful, and many businesses have to convert to Chapter 7

The Pros and Cons of Chapter 13 Filing

First, what is Chapter 13 Business Bankruptcy?

Chapter 13 can be used by sole proprietors, one-person corporations, and certain LLCs in some states to repay some debt, “cram down” any assets that are subject to loans and otherwise reorganize their business under a three- to five- year repayment plan.

The Pros of Chapter 13 Business Filing

• The business continues operations
• Obligations are paid over time in part
• The value of assets can be “crammed down” to market value; debtor pays less

The Cons of Chapter 13 Business Filing

• The plan must be paid in full over time for the business to receive a discharge and be able to continue operations
• Businesses often cannot make plan payments and must convert to Chapter 7
• Can only be filed by individuals such as sole proprietorships and certain LLCs
• Is subject to debt limits, currently, an individual owing more than $419,275 for unsecured debt and $1,257,850 for secured debt can’t file Chapter 13 and must file Chapter 11.

Filing bankruptcy for a business is complex and the rules vary greatly state-to-state. Frequently, small business owners are better off filing personal bankruptcy instead of business bankruptcy depending upon the way their business is organized, their debt circumstances, and their goals.

Be sure to consult with an experienced bankruptcy attorney and discuss all of your options prior to taking action – you will be glad you did.

About the Author

Veronica Baxter is a writer at AssignYourWriter, blogger, and legal assistant operating out of the greater Philadelphia area.