The bankruptcy options available for people who are self-employed and for ordinary businesses are very similar to the options available to individuals with ordinary consumer debt. The primary difference is that there are some additional options available for a business that may give more flexibility.
Liquidation Bankruptcy: A business can use the same Chapter 7 bankruptcy that is available to individuals. This is a tool that is only used where the business has closed. The bankruptcy trustee gathers the remaining assets of the business, sells them and uses the proceeds to make pro-rata distributions to creditors. This is not something that we do often for a corporation or an LLC because there are effective alternatives that are less expensive and less risky.
Payment Plan Bankruptcy: The same Chapter 13 payment plan bankruptcy that is available to individuals is also available to sole proprietorship businesses. The major limiting factor in the Chapter 13 Bankruptcy is that any re-structured debt must be paid off over a five-year term. For some situations, the debt that we want to restructure is too big for it to feasibly be repaid over a five-year term.
Family Farmer Bankruptcy: There is a special type of bankruptcy that is only available to family farmers and fishermen. It is called a “Chapter 12 Bankruptcy.” For the farmer or fisherman (fisherperson), the Chapter 12 Bankruptcy allows you to restructure debt and pay it over a term that can be longer than five years. In many cases mortgage loans, heavy equipment loans and financing loans secured against cattle or equipment can be restructured over a period of time that is reasonable for the type of loan. It is an excellent tool for saving the farm.
Reorganization Bankruptcy: When you hear the term “reorganization bankruptcy,” this is usually referring to a Chapter 11 Bankruptcy. The Chapter 11 Bankruptcy is a type of payment plan bankruptcy that has much of the flexibility of a Family Farmer bankruptcy but is available to any type of business. Historically, this has only been an affordable option for larger businesses or wealthy individuals. However, a new law in 2020 has made this option more affordable for smaller businesses.
Most people wait too long to talk to an attorney. By waiting too long, options become unavailable. The earlier you talk with a lawyer the more options may be available to you. Give us a call. Schedule a free consultation. We can help.