The idea of filing bankruptcy may be scary. For many people, they may fear that taking such an action will be admitting failure, or that it will negatively affect their credit rating on a permanent basis. Neither of those fears are based in fact.
In fact, bankruptcy laws were enacted to help businesses and individuals overcome extreme financial difficulties and get back on their feet so that they can move ahead. While there may be some temporary negative effects on your business, bankruptcy is designed to help and protect the business owner.
Understanding the different types of bankruptcy filings will help you in determining the best path forward for your business. As with any decision this large, consulting a financial expert and a reputable bankruptcy attorney is advisable.
Chapter 7 filings have been on the rise in recent years. The design of Chapter 7 is to wipe out your debts and start over with a clean slate. While this may seem like the best alternative when you are facing debts you cannot possibly repay, it is important to note that in most cases, Chapter 7 requires a complete liquidation of assets and closing of the business. If you desire to continue in your current business, this is probably not your best choice.
Chapter 11 is perhaps the most popular filing for businesses and corporations. This option allows for the reorganization of the business and restructuring of the debt, while allowing the business to remain in operation. There are no debt or income requirements for filing for a Chapter 11 which means that almost anybody can file under this form of bankruptcy.
Something to consider however, is the fact that this type of filing can also be quite expensive and complex, so consulting with a good bankruptcy attorney would be wise before making this choice. The usual terms of debt repayment in these cases is 5 years, although extended terms can be approved by the court, especially in the case of small businesses.
This option is not available for all businesses. The only businesses eligible for filing under Chapter 13 are those operating as a sole proprietorships. Unlike chapter 11, there is also debt limitation on a Chapter 13 filing. You should also be aware that under this type of bankruptcy protection, the court will appoint a trustee to manage your assets and the repayment of your debts. Because of this, your disposable income (the amount of income over what is reasonably necessary for your living expenses) must be turned over to the trustee during length of the bankruptcy term. Chapter 13 terms usually last 3 to 5 years.
Reclaiming Your Life and Rebuilding Your Credit
It should be stated again that, while it may seem scary, bankruptcy is actually designed to help you. Most cases will not last longer than 5 years, and when you emerge, you will have your life back, and can begin rebuilding your credit. It is even possible in some cases to start rebuilding your credit while in bankruptcy by virtue of regular and timely payments to your creditors.
The decision to pursue this protection is one that should be made carefully and after seeking sound legal and financial advice. However, if you are in over your head, there is nothing wrong at all with pursuing the safety-net that has been provided for you.
David Drasnin is a freelance writer for LeraBlog and he’s always keeping busy and is currently working on a number of projects including researching bankruptcy regulations and debt management strategies.