Small business debtors, other than fisherman and farmers, have three alternatives when dealing with insolvency under the Bankruptcy Code, Chapter 7, Chapter 11 and Chapter 13. Each has its unique appeal, depending on the future view of the business owner.
Chapter 7 is best for those who wish to walk away. By appointing a Trustee, who takes possession of all the business assets, liquidates them, and pays creditors, the business owner gets a process of liquidation and winding up for very little cost. Of course, if the business is not a separate legal entity, this can be problematic.
Chapter 11 offers the widest scope and longest range of reorganization options. For business owners with solid vendor and customer relationships, with a developed business, this may offer the best way to weather and emerge from a storm with the company intact. The major drawback to this process is the amount of attorney fees and court time usually attendant to Chapter 11 cases.
Lastly, if the business owner is operating a proprietorship with debts below apx. $1,000,000, Chapter 13 may be a very attractive option. Besides being the only Chapter that affords debt relief and reorganization in one form, Chapter 13 is inexpensive compared to Chapter 11 and can facilitate many of the same changes necessary to help reform and emerge as a successful business.
The business bankruptcy system exists for the purpose of helping overburdened companies re-enter the commercial marketplace, maintain asset utilization, and stabilize employment. There are few businesses that don’t hit a bump or two in the road, reorganization can be a pathway to renewed growth and success.