Are things going south for your business? Filing for bankruptcy might be the last thing to enter your mind, especially if you still want to bring your business back to life. Even though there’s a certain stigma surrounding bankruptcy, it pays to learn that it can be your ticket to success. While this doesn’t mean you should consider bankruptcy as a first option, it’s beneficial to recognize its benefits in terms of providing financial relief.
Bankruptcy rates across the nation increase each year steadily. Unemployment continues to be a huge problem, driving down the income levels of countless Americans. Higher income states see fewer bankruptcy filings than states with low per capita income. Business bankruptcies are not uncommon as well. Most experts advise avoiding bankruptcy, at least before trying other options including taking a loan from friends and family, working with a debt consolidation company, and trying to increase personal income.
A Knoxville-based bankruptcy lawyer, Denna Middleton, explains that bankruptcies filed under Chapter 7 or Chapter 13 can prove beneficial, especially for non-business bankruptcies. If you’re running a business, however, it’s still possible to file for Chapter 7 or Chapter 13 bankruptcy depending on your business structure.
Your first order of business is to determine whether you will be held liable for business debts. A sole proprietorship is not considered a separate legal entity. This makes you liable for all business debts. Things get tricky for a partnership, corporation, or LLC. In general, you are not personally liable if you did not co-sign or guarantee the debt.
Upon filing for Chapter 7 bankruptcy, an automatic stay takes effect immediately. This means that any collection activity is prohibited, so you will stop hearing from creditors and collection agents. A bankruptcy trustee goes on to sell your nonexempt assets to pay off creditors.
It’s worth noting that there’s a critical difference between a personal bankruptcy and a business bankruptcy. In the former, the dischargeable debts are eliminated, so the debtor doesn’t have to pay them any longer. In the latter, there are no dischargeable debts and exempted assets. This means that your business assets will be sold, the proceeds of which will be given to creditors.
Chapter 13 bankruptcy is less common, but it can prove to be the right choice depending on your circumstances. If you are earning a stable income, you can agree to contribute part of your earnings to pay off creditors. The primary advantage is that you keep control of your assets, although not debt will be discharged until the payment plan is completed.
Filing for bankruptcy can offer a fresh financial start. Getting your debts discharged means you have a clean slate to work with, and it’s up to you how to move forward and forge your next venture. Although you might still run into issues when applying for loans and credit cards, you can build your credit gradually until you reach the level at which creditors start to regain confidence in you as a responsible debtor.