How Does Personal Bankruptcy Affect Your Spouses Credit Or Assets
If you file for bankruptcy, it only impacts your partner if your bankruptcyfilingincludesdebtsthat youve both co-signed on . In that case, your partner is responsible for those debts, even if youhave filed for bankruptcy. If co-signed loans are too much for your partner to manage alone, speak with an LIT to discussdebt relief options, like a consumer proposal,debtconsolidation, or, in extreme situations, bankruptcy.
Chapter 7 For Business Owners
Chapter 7 bankruptcy uses liquidation to handle a failing business. If you file Chapter 7, you must close the business and give up your assets. The assets you forfeit depend on your business structure.
Individuals and businesses can file Chapter 7, including the following types of business structures:
- Sole proprietorships
- Limited liability companies
Although all business entities can file, sole proprietors receive a different outcome than other structures.
If youre a sole proprietor declaring bankruptcy, consider filing under Chapter 7. This type of bankruptcy is cheaper and easier than others for sole proprietorships.
Chapter 7 for sole proprietors
With Chapter 7, unsecured debts get wiped out. You do not need to pay your qualifying debts. This can wipe out debts such as credit card debts, loans, back rent, utility bills, and lawsuit judgments.
Chapter 7 relieves you of most business and personal debts, but there is a downside. Because a sole proprietorship is not a separate legal entity, you are personally responsible for all business assets. As a result, your personal assets are at risk.
While some assets are exempt, items such as your equipment, vehicles, and mortgage could be seized and sold to pay debts.
Chapter 7 for partnerships, corporations, and LLCs
Although you can file Chapter 7 bankruptcy for your business if its not structured as a sole proprietorship, it works a little differently.
Different Types Of Bankruptcy
Bankruptcy is a formal process that gives a business the opportunity to reorganize and pause payments on debts while doing so or before going out of business. There are several different types of business bankruptcy:
- Administration A company can try to preserve its business venture by choosing administration rather than liquidation bankruptcy. During administration, an appointed administrator decides how to turn the business around in order to pay its debts and avoid insolvency. The administrator may determine to sell the company or explore funding options that can keep the company operating.
- Chapter 7 bankruptcy Under Chapter 7 bankruptcy, a business determines that its debts are so overwhelming that there is no option other than to close the business. A court-appointed trustee becomes responsible for selling company assets, the proceeds of which are used to pay off the companys debts.
- Chapter 11 bankruptcy Under Chapter 11 bankruptcy, a company can reorganize and create a plan to repay creditors over time. Creditors get an opportunity to vote on that plan. The company can continue to operate, but financial decisions must be approved by a bankruptcy court.
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How Do I Know If Restructuring Would Help
Write a business plan for a post-pandemic business world. How will your business operate? Where will revenue come from? What new expenses for marketing, infrastructure and more will you incur to help your business pivot? If you can write a business plan that shows a positive balance sheet after bankruptcy, restructuring might work.
Chapter 11 bankruptcy is designed to fix peoples balance sheets, Mr. Keach, the Maine lawyer, said. It allows you to restructure some debt, eliminate other debt. It doesnt generate revenue for you.
How Does The Bankruptcy Filing Process Work
Federal courts handle bankruptcies. To get the ball rolling with bankruptcy, you must file a petition with your local federal bankruptcy court. The petition asks for information like your name and address, debt amounts, number of creditors, and asset value.
Once you send the petition, you receive an automatic stay. That means your creditors must stop trying to collect money from you.
You must also file bankruptcy schedules when starting the bankruptcy process. The schedules list your assets and liabilities, income and expenses, and contracts and leases.
The type of bankruptcy you file and your business structure affect what happens after filing. In some cases, your business debts are dismissed. But depending on the type of bankruptcy and structure you operate under, your personal assets could be at risk.
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Do I Have To File For Bankruptcy To Close My Business
No. If you can pay off your creditors or negotiate a deal with them, you dont need to file for bankruptcy protection. But you will want a lawyer to draft agreements.
Also: Dont forget about withholding taxes. When times are tight, many small-business owners who manage their own payroll dip into that pot of money they set aside at each pay period and use it for other expenses.
If you have unpaid withholding taxes, the business owner becomes personally liable, Ms. Clayson said.
What Happens If Your Small Business Files For Bankruptcy
Youre likely fighting hard to keep your small business alive through the coronavirus. Whether that means cutting back on unnecessary expenses, restructuring client contracts, or applying for small business loans, youre working around the clock to keep your business afloat.
Unfortunately, many US small business owners are feeling overwhelmed, overworked, and over-leveragedleaving them contemplating bankruptcy.
Its not just small businesses struggling right now. The XFL, which launched this year for the first time in almost 2 decades, had to lay off employees, suspend business, and file for Chapter 13 bankruptcy because of the coronavirus.
Bankruptcy might seem like an appealing option for struggling small businesses, but its not without risk and repercussions.
Moving forward with bankruptcy affects the future of your business and credit. Heres what happens when you decide to declare bankruptcy for your small business.
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This Story Is Part Of A Group Of Stories Called
Bankruptcy leaves the impression of utter failure, and when a company goes bankrupt, its easy to assume that its dead, may it rest in peace. According to this line of thinking, heres an alarming tidbit: If you regularly travel by plane, theres a decent chance youve flown with an airline that was bankrupt at the time. United filed for bankruptcy in 2002, followed by Delta in 2005 and American Airlines in 2011.
While bankruptcy can result in the liquidation or sale of a company, it also presents an opportunity for it to restructure while continuing to operate, suspend or reconfigure debt payment, and get back on its feet, so to speak. That was the case for United, Delta, and American, which all exited bankruptcy in less than four years. Since 2017, weve seen a wave of once-powerful retailers going the same route, like Sears, Mattress Firm, the clothing brand BCBG, and the accessories chain Claires.
The idea of corporate bankruptcy as a reset button is an American invention dating to the 19th century, says Fordham law professor Richard Squire. A boom in the railroad industry had led to over-building, and with too many railroads, some inevitably failed. But these businesses still had value, having invested heavily in laying down rails and building engines and cars. People realized that the cash generated by liquidating these assets selling them off piece by piece wouldnt be as great as the gains from letting the railroads continue to operate.
Chapter 7 Bankruptcy For A Sole Proprietorship
Chapter 7 bankruptcy known also as liquidation or straight bankruptcy means the end of the business. The process involves surrendering nonexempt property to be sold by the trustee assigned to your case, with the proceeds being distributed among creditors.
Exemptions, varying by state, are designed to let you to hang onto fundamental necessities to help with your fresh, post-bankruptcy start. Among these are some home equity, vehicles, furniture, clothing, and tools of the trade.
Generally, however, exemptions for business assets are not large. If you choose Chapter 7, youll most likely lose it. Thats the ugly part.
Here are the upsides to Chapter 7:
- If most of your debt comes from your business, you are eligible to file Chapter 7 without having to pass a bankruptcy means test.
- You are not directly on the hook for any debts. Typical business debts what you owe suppliers, landlords, vendors, and credit card companies will be wiped clean.
- The time from filing to discharge is fairly brief, from four to six months.
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How To Avoid Business Bankruptcy
Are your finances teetering on the edge? Do you owe your creditors far more than you can possibly repay? With a drop in sales and negativecash flows, you might be wondering if its time to declare bankruptcy. Dont throw in the towel just yet we have a few tips below to help.
Sole Proprietors May Get Help With Personal Debt
While most small business owners will file Chapter 7 bankruptcy, sole proprietors have another option: Chapter 13. With this option, you may be able to list both personal and professional debts in your bankruptcy filing. For example, if you operate your business out of your home, you may be able to include missed rent payments.
Another way Chapter 13 bankruptcy helps sole proprietors is by keeping them in business. You may be able to stay operational as you work down your debt and get out of bankruptcy over time.
Using the home-based business again, it is much harder to liquidate assets as these sole proprietors would have to sell their houses and their cars to pay off debt, leaving them homeless and otherwise unable to work.
However, the combination of your personal and professional finances in Chapter 13 bankruptcy may impact your . Chapter 7 bankruptcy is recorded on your credit report for up to 10 years, while Chapter 13 is reported for up to 7 years.
In some cases, bankruptcy is unavoidable. If you decide that you need to go this route, make sure you know your options. Be informed about the bankruptcy process and the steps you can take to make it go smoother.
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Chapter 11 Subchapter 5
The Small Business Reorganization Act is a new form of bankruptcy enacted by Congress in 2019. It creates a process under Chapter 11subchapter V that makes it easier and less expensive for businesses with less than $2,725,625 million in debt to restructure debt. The CARES Act temporarily raised the limit under the SBRA to $7.5 million in debt, provided that 50% or more of the business debts arise from business or commercial activities.
This new type of bankruptcy is already making it possible for more small businesses to restructure their business debts and remain in business.
What Is Business Bankruptcy
Business bankruptcy is a legal debt solution that business owners may consider when a business cannot pay its debts.
Business owners should also consider a Business Proposal as an alternative to business bankruptcy. Before filing a bankruptcy or proposal its important for business owners and stakeholders to understand the complexities of these processes, including all potential liabilities and repercussions of both unique options.
Because there are different types of business structures, bankruptcy options for business debts can vary greatly. In many cases, the decision of how to proceed with managing business debts will largely depend on what the impact of the debts are to the business owners or directors personally.
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Number Of Bankruptcy Filings
The number of bankruptcy filings in the United States has steadily increased over the last century, and especially so from 1980 to 2005.
Bankruptcy filings hit an all-time high in 2005, when more than 2 million cases were started. In that year, one out of every 55 households filed for bankruptcy.
The following year, bankruptcy filings dipped to about 600,000, the lowest point in 20 years.
The vast majority of bankruptcies are now filed by consumers and not by businesses. In 1980, businesses accounted for 13 percent of bankruptcies. Today, they account for about 3 percent.
Advantages Of Chapter 13 Bankruptcy For Small Business Owners
In Chapter 13, you get to keep all your assets and pay back all or a portion of your debts through a repayment plan. If you are a sole proprietor with a lot of business assets, a Chapter 7 trustee may sell them if you don’t have adequate bankruptcy exemptions to protect the property.
By filing a Chapter 13, you can protect all business assets and keep the business running while reorganizing your debts. Keep in mind, however, that you must pay the value of nonexempt assets through your repayment plan, which can pose a problem if your ownership interest in the business is substantial.
Even if your business is a separate entity like a partnership, corporation, or LLC, you can reorganize your personal liability for business debts with a Chapter 13. Further, you can do things with a Chapter 13 that you can’t in Chapter 7, such as:
- catch up on a house, car, or equipment payment
- pay off priority creditors, such as tax debt and domestic support obligations, and
- reduce some loans to the value of the property .
Best yet, you’ll get up to five years for your plan.
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What Is The Role Of The Us Securities & Exchange Commission In Chapter 11 Bankruptcies
Generally, the SEC’s role is limited. The SEC will:
- review the disclosure document to determine if the company is telling investors and creditors the important information they need to know and
- ensure that stockholders are represented by an official committee, if appropriate.
Although the SEC does not negotiate the economic terms of reorganization plans, we may take a position on important legal issues that will affect the rights of public investors in other bankruptcy cases as well. For example, the SEC may step in if we believe that the company’s officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.
If You’re Overwhelmed By Your Debts Bankruptcy Is Just One Option
If you have large debts that you cant repay, are behind in your mortgage payments and in danger of foreclosure, are being harassed by bill collectorsor all of the abovedeclaring bankruptcy might be your answer. Or it might not be.
Bankruptcy can, in some cases, reduce or eliminate your debts, save your home and keep those bill collectors at bay, but it also has serious consequences, including long-term damage to your . That, in turn, can hamper your ability to borrow in the future, raise the rates you pay for insurance, and even make it difficult to get a job.
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Bankruptcy And The Pope Firm Was Very Helpful
I recently went through bankruptcy and the Pope Firm was very helpful in a very embarrassing situation. They went through the process of how bankruptcy works and made what could have been a very difficult time much easier to handle. I would recommend this law firm to anybody who is going through a bankruptcy. Everyone there is very knowledgeable and willing to answer any questions.
How Bankruptcy Affects Investors
Clearly, nobody invests money in a company, whether through its stock or its debt instruments, expecting it to declare bankruptcy. However, when you venture outside of the risk-free realm of government-issued securities, you are accepting this added risk.
When a company begins bankruptcy proceedings, its stocks and bonds usually continue trading, albeit at extremely low prices. Generally, if you are a shareholder, you will usually see a substantial decline in the value of your shares in the time leading up to the company’s bankruptcy declaration. Bonds for near-bankrupt companies are usually rated as .
Once the company goes bankrupt, there is a very good chance you will not get back the full value of your investment. In fact, there is a strong possibility that you won’t get anything back at all.
As the SEC summarizes, “During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”
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Chapter 11 Bankruptcy: Reorganization
Chapter 11 is for any entity, LLC, corporation, sole proprietor, or partnership that wants to run their business while reorganizing its debt. Businesses that are struggling follow this course when the situation is not hopeless, and they continue operating with assistance from the bankruptcy court.
When the company shuts down and the trustee controls the business assets and debts in chapter 7, chapter 11 is where the business owner maintains the control and makes decisions for the company as long as the court agrees. The goal is to pay off the debts in a specified time from and then emerge from bankruptcy as a debt-free operational organization.
In order to qualify for chapter 11, your business needs to still generate income. With chapter 13, you must submit a reorganization plan to the court to show how you intend to pay back the debt. The court and your creditors need to review and approve your plan.