Small businesses have always been a key piece of the American economy. Here in Chicago and across the country, entrepreneurs and dreamers work hard to build relationships, tackle problems, and turn their passions into a way to make a reliable living. 

According to data from Pew Research center, self-employed Americans and their employees account for about 30% of the nation’s workforce, or roughly 44 million jobs. About one quarter of self-employed people have employees of their own. Other studies have indicated that small businesses in the US are responsible for employing as many as 57 million people. One report suggests that there are about 543,000 small businesses started each and every month. 

So, what happens when your dreams fall short of expectations, and you need a helping hand? For business owners and freelancers struggling with financial strain and mounting debts, bankruptcy may be a viable way forward. 

Broadly speaking, there are a few different types of bankruptcy available to businesses. Finding the right type of business bankruptcy process will depend on a number of factors, including the type of business and how it is owned, as well as the amount of debt that the organization holds. 

Sole Proprietorship, Partnership, Corporation

First and foremost, it’s important to note that the type of bankruptcy a business may be able to file will depend on the form of the business itself. For instance? Many businesses in the US fall under the category of “sole proprietorship.” In a sole proprietorship, a business is owned by an individual in their own name, and any bankruptcy case will be directly connected to the individual. 

In other cases, a business may be a partnership; in this arrangement, the business may be considered a separate entity, with finances distinct from the partners’. Finally, a business may be a corporation if it is owned by several individuals, entities, or corporations, with shares used to represent the ownership interest. 

Why is this distinction so important? As we noted earlier, different forms of bankruptcy may be used for different categories of businesses, depending on their structure (among other factors). A sole proprietorship, for instance, may benefit from using Chapter 7 or Chapter 13, while a larger corporation may employ Chapter 11. 

Let’s dive into Chapter 7, Chapter 13, and Chapter 11, and explore how these different types of bankruptcy function for businesses:

Chapter 7: Liquidation Bankruptcy for Businesses 

Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy. It is commonly used when a small business is unlikely to be able to continue to operate, given the amount of its debts.It is also a practical solution for businesses with limited assets, or sole proprietorships that cannot realistically be reorganized through Chapter 11. 

In Chapter 7, the bankruptcy court will appoint a trustee to collect and review the assets owned by a business, and liquidate them in order to repay creditors, in order of priority. Once all assets are liquidated and trustee fees paid, the owner of a sole proprietorship is generally granted a discharge from their debt obligations. Partnerships and corporations will not necessarily receive a discharge. Typically, Chapter 7 results in a business ceasing operations, liquidating all of its assets, and, more often than not, being fully dissolved. 

One important thing to keep in mind? For individual business owners considering Chapter 7, the means test does not apply if more than half of your debts are business-related. 

Chapter 13: Personal Bankruptcy for Business Owners

For individual business owners who want to maintain operations, filing for personal bankruptcy in Chapter 13 may be a valid path forward. In Chapter 13 bankruptcy, a consumer works with their creditors in order to create a long-term repayment plan, typically paid out in monthly installments over the span of three to five years. At the end of this repayment period, remaining debts may be discharged, subject to the terms of the Chapter 13 plan. 

Chapter 13 is a consumer-focused bankruptcy, and does not apply to partnerships and corporations. However, it may be a practical solution for the owners of sole proprietorships weighed down by personal debts. In this case, the bankruptcy trustee will carefully review the finances of the business, in order to determine if it generates enough income for the debtor to keep up with their repayment plan over time. 

For individuals who are partial owners of a partnership or corporation, any interest or stock will be regarded as an asset of the debtor in Chapter 13. The bankruptcy will not necessarily impact the company or the asset itself. 

Chapter 11: Reorganization Bankruptcy for Businesses

Though it can be used by individual debtors in certain cases, Chapter 11 is often what people think of when they think of business bankruptcy. It is a fixture on the nightly news, as many national corporations make headlines when they file for Chapter 11. Broadly speaking, Chapter 11 is used primarily by larger companies and corporations, which have a valid chance of turning the corner and generating a profit in the future. 

Under Chapter 11, the company reorganizes itself by creating a detailed plan and submitting it to a panel of creditors and other stakeholders, who take a vote. If the impaired creditors approve the plan, it is then submitted to the bankruptcy court, which grants final approval, and the business will move to fulfill the terms of the plan. Chapter 11 bankruptcy can be incredibly complex, and may affect a business’ operations for years, or even decades. 

One major advantage of Chapter 11 for businesses, however, is that it often allows them to function with fewer restrictions. While a US Trustee may appoint an active trustee in certain cases, in many instances, the debtor may act as a debtor-in-possession, serving as its own trustee and continuing business operations while it works out the details of its debt restructuring plan. 

Bonus: Chapter 12: Bankruptcy for Farms and Fisheries

According to data cited by The Balance, there were fewer than 500 filings of Chapter 12 bankruptcy in 2016. So, what is Chapter 12? This narrow form of bankruptcy is a relatively modern invention, and is limited in scope to farmers and fishermen. In order to qualify for Chapter 12, a debtor must draw more than half of their income from farming or fishing business, and must owe a majority of their debts due to farming or fishing operations. 

Have Any More Questions About Business Bankruptcy?

Curious about whether bankruptcy is the right debt relief strategy for you? Interested in finding out more about the ins and outs of the bankruptcy process here in Chicagoland? In many ways, the best way to determine if you qualify for bankruptcy, and what strategies to pursue in bankruptcy, is to consult with a legal professional.

With an experienced bankruptcy attorney on your side, there is no need to search for all the variables and hope you don’t miss any key detail, or waste your time seeking out costly and ineffective third party solutions.

Instead, an attorney can help you pursue the right course of action for your unique financial situation. At the same time, a legal professional can offer the force of law to protect you from debt collectors and creditors, all while being held to a higher standard by the state and ethics review boards than private operators.

About the Gunderson Law Firm

Looking to get a better understanding of bankruptcy for business owners? Wondering if it may be a practical course of action for you? Do not hesitate to get in touch with the Gunderson Law Firm. 

We can get you actual, straightforward answers unique to your personal situation, and your first consultation with us costs you absolutely nothing.

At the Gunderson Law Firm, we protect our clients’ assets to the full extent allowed by today’s laws, helping them get the debt relief they not only need, but genuinely deserve. We will take all steps possible to protect you and your assets throughout the entire bankruptcy process, while also counseling you on realistic ways to avoid such serious debt issues in the future. Whether you are a business owner, a wage earner, retired, or otherwise, we can address your specific situation with a strategic plan to help put severe indebtedness behind you, so you can truly enjoy life again. Drop us a line whenever you’re ready to get the conversation started.