It’s difficult to deal with vast sums of debt incurred by a failing company. If your small company is failing, you should consider your options. If your business goes through so much debt, you could lose your savings, car, and house. Bankruptcy will save you from losing everything you’ve worked for as a small business owner.
When you find yourself in financial distress, you have several choices to explore. Get the help you require to recover your financial future by looking for loans after bankruptcy.
What Happens After Filing for Bankruptcy
After declaring bankruptcy, your creditors will stop collecting funds from you. A trustee will be in charge of managing your assets and making payments to the creditors. What happens when you file for bankruptcy depends on the kind of bankruptcy you petition and your company’s structure. Your company debts can be discharged in some circumstances. Your personal properties can be at risk based on the type of bankruptcy and organizational form you operate.
There are two options for dealing with a failed company during bankruptcy: liquidation or reorganization. Some forms of bankruptcy involve liquidation, while others involve reorganization.
Liquidation
When a business is unable to cover its debts, it can be forced to liquidate the firm. During liquidation, the company closes, and its properties are distributed to creditors.
Liquidation for Sole Proprietors
If your business is a sole proprietorship, declare bankruptcy through liquidation. For sole proprietorships, this form of bankruptcy is less expensive and simpler than others.
With liquidation, all qualified personal and business debts are dismissed. Liquidation often discharges debts like credit card debts, back rent, loans, lawsuit judgments, and utility bills. Certain obligations, like tax liabilities, cannot be discharged.
Liquidation discharges most business and personal obligations, although there is a drawback. Under the law, sole proprietors and their businesses are not distinct entities. You are responsible for every company’s obligations.
Liquidation for Partnerships and Corporations
Corporations and partnerships can also declare bankruptcy through liquidation. However, this form of bankruptcy operates a bit differently than with sole proprietorships. Corporations and corporations, unlike sole proprietorships, cannot use liquidation to dismiss company debts.
A partnership’s partners are treated as one legal entity as the company. Partners are liable for any corporate debt. After the properties are sold, the sellers must pay off the company’s outstanding debts to creditors.
Corporations shield shareholders from personal liability for company debt. However, when it comes to settling company obligations, shareholders are not really in the clear.
Reorganization
There is also hope that a struggling company can be rescued. Reorganization allows a business owner to prolong the life of the firm. Reorganization entails restating assets and liabilities. New payment plans are made, and the company continues to run.
Reorganization for Sole Proprietors
Reorganization allows proprietors to declare bankruptcy without having to close the company. Your debts will be restructured, allowing you to make fewer contributions to creditors. Under the reorganization, you must have enough monthly income to pay creditors.
Normally a sole proprietor will not file for reorganization. File for reorganization only if you want to continue operating your business or are ineligible for liquidation.
Reorganization for Partnerships and Corporations
As a corporation or partnership, reorganization allows you to operate your company while making small payments to creditors through loans after bankruptcy.
While you will continue to run your business, reorganization is more costly than liquidation. Small companies avoid reorganization because, in addition to the cost, it is a time-consuming, risky and complex operation. Before filing for reorganization, consider your company’s longevity and capacity to repay debt.
If your company is failing, bankruptcy saves you from losing any of your personal possessions. Before filing for bankruptcy, consult with a commercial bankruptcy attorney.