Does bankruptcy seem scary? It shouldn’t. Businesses of all sizes experience financial trouble, and bankruptcy is a proven method that provides a way out and a fresh start.
Business owners can choose either Chapter 7 or Chapter 11.
Chapter 7 is referred to as business liquidation. This form of bankruptcy discharges business debts you are unable to pay and any other requirements you are unable to carry out. Liquidation allows for a new start free of outside pressure of having to pay past due debts.
Chapter 11 bankruptcy allows business owners to suspend debt obligations while creating a reorganization plan to pay back those creditors.
While Chapter 7 bankruptcy is pretty straightforward and offers a precise path via liquidation, below are a few other benefits to choosing Chapter 11.
Briefly mentioned above, Chapter 11 allows you to temporarily suspend payments toward past, current or accrued debt. Though creditors will form a committee to provide the overseeing judge with information, Chapter 11 reorganizations often propose that you only pay back a portion of the debt. If the creditors agree, you could save thousands or even millions depending on the size of your business.
Chapter 11 provides you the opportunity to renegotiate contractual terms with labor unions, vendors or suppliers. Most will be willing to reduce the debt you owe and renegotiate because it equates with you staying in business.
The suspension of debt payments provides the business owner with breathing room to thoroughly asses the current situation. It allows you to identify methods to cut costs, increase profit or take other proper measures to avoid a second bout of bankruptcy.
Due to your competitors having to pay their debts and inability to form more favorable contracts or lower their obligations, a survey conducted by CFO magazine found that many business owners believe Chapter 11 bankruptcy provides that business a competitive advantage.
Decreasing personal risk
Chapter 11 allows you to suspend and lower your debt payments temporarily and renegotiate contracts, but, even though you close up shop, you are still liable to pay carrying costs. These include:
- Mortgage or rent
- Business and property taxes
- Possible security or maintenance costs
Chapter 7 provides relief from all of this. Once your business endures liquidation, all business-related debt obligations cease.
Keep in mind that Chapter 7 pays off your accrued debt with your personal assets, which could include your home and vehicle, among others.