Which Type of Bankruptcy is Best for Your Small Business? Make Sure You Choose the Correct Form

Which Type of Bankruptcy is Best for Your Small Business?
Make Sure You Choose the Correct Form

Richard Fonfrias, J.D.
Chicago’s Financial Rescue
& Bankruptcy Lawyer
Fonfrias Law Group, LLC


Many business owners feel a huge burden lifted from their shoulders when they file for bankruptcy. And rightfully so. Because bankruptcy is intended to give individuals and businesses the “fresh start” they deserve when they have no way to pay their debts.

But filing for bankruptcy won’t feel so good if you choose the wrong type. So here are the different forms of bankruptcy and the situations each is designed to address:
Chapter 7 Bankruptcy (also known as liquidation): Chapter 7 bankruptcy is often used by small business owners when they have few if any assets and they want to simply walk away from the business. In this case, the bankruptcy trustee conducts a sale of the assets to pay creditors according to their legal priority. And any debts left unpaid are discharged by the bankruptcy court.

Chapter 11 Bankruptcy (also known as reorganization): Chapter 11 bankruptcy is used by owners of LLCs, corporations, partnerships and sole proprietorships that do not want to liquidate their assets. Instead, they want to reorganize their business debts so they can get on track to create a bright financial future.
Chapter 12 Bankruptcy (repayment): Chapter 12 bankruptcy was created for use only by family farmers and family fisherman. The purpose of this bankruptcy is to ensure that the debtor’s annual income is sufficiently stable and regular to permit the debtor to make payments. It allows for situations in which family farmers or fisherman have income that is seasonal in nature.

Chapter 13 Bankruptcy (repayment): Chapter 13 bankruptcy allows an individual or sole proprietor to create a repayment plan, which he files with the bankruptcy court, that details how he is going to repay his debts. The maximum time allowed for the repayment plan is five years.

All forms of bankruptcy are handled through the federal bankruptcy court. Make sure that you consult with an experienced bankruptcy lawyer to select the form most appropriate for you and so you provide the records and other paperwork required by the court.