How to choose between Chapter 7 and Chapter 11 bankruptcy

If you have resolved to declare bankruptcy on behalf of your small business, you will...

If you have resolved to declare bankruptcy on behalf of your small business, you will need to decide which type - Chapter 7 or Chapter 11 - is right for you.

Sometimes referred to as liquidation bankruptcy, Chapter 7 is for individuals and companies that are at the end of their financial ropes. Those who file for it can successfully sell off any assets to pay creditors. At the end of the process, the petitioner no longer owes any debts. Chapter 11 bankruptcy, known as rehabilitation bankruptcy, allows your business the chance to reorganize its debt and get back on its feet.

When determining which type better suits your situation, you should ask yourself these five questions:

1. Are you personally liable for your business's debts?

Those who are responsible for their business's debts are people whose companies are structured as general partnerships or sole proprietorship. If this fits your situation, you are better off filing for Chapter 7 bankruptcy. If, on the other hand, your business is structured as a limited liability corporation or a general corporation, the business itself is responsible for paying its debts, which means Chapter 11 may be a better decision.

2. How would you perform on a means test?

Those who file Chapter 7 bankruptcy will be required to pass a "means test," which in part measures whether a petitioner's income exceeds the national median income. You will not pass the means test if your income is higher than that of the national median, as well as if it provides enough money to pay a large portion of unsecured debts.

3. What are your goals for your business?

If your business is no longer operating, you are a good candidate for liquidation bankruptcy. However, if your business is still operating and you intend to keep it that way, you should consider a Chapter 11 bankruptcy. Chapter 11 allows a business to pay what it can and get back on its feet financially.

4. Is your business capable of making partial payments to creditors?

Through Chapter 11 reorganization, your business and attorney can work with creditors on a repayment plan. This usually involves an extended payout and low, partial payments to creditors with whom your debt is unsecured. If your business can make such payments, Chapter 11 is probably a good fit.

5. Do you have enough money to pay filing fees?

It costs significantly more in court fees to file for Chapter 11 than Chapter 7. In most cases, it costs three times as much to file for the former. Attorneys tend to charge considerably more to represent Chapter 11 clients because the cases require significantly more work than other types of bankruptcy cases.

For guidance in deciding which bankruptcy type is right for you, consult a professional Atlanta financial advisor.

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