Bankruptcy Overview

• There are two broad types of bankruptcy: liquidations and reorganizations. A reorganization bankruptcy may be appropriate when the business or individual is able to make at least a partial repayment of debts owed over time. Reorganization bankruptcies are governed by Chapter 11 for businesses and Chapter 13 for individuals. In a reorganization bankruptcy, the debtor commits to a three- or five-year repayment plan to effect the gradual payment of some or all of the debt owed. Chapter 12 governs the bankruptcy of farmers and independent fishermen, and provides for higher exemptions that recognize the substantial assets needed to "start over" in these professions.
  
  

Chapter 7 Bankruptcy

• Because Chapter 7 bankruptcy involves the complete discharge of most debts, it is the most severe form of bankruptcy and the most difficult to qualify for. The courts frequently deny access to Chapter 7 for filers that have the means or assets to pay back part or all of the amount owed. Corporations, however, do not receive discharges under Chapter 7. If a corporation goes bankrupt, it simply closes its doors and the state dissolves the corporation. Filers can choose Chapter 11 or 12 as an alternative. Individuals can pursue a reorganization under Chapter 13. Businesses are completely liquidated under Chapter 7, while individuals are allowed to keep limited assets with which to start over. The specific amounts vary with state law.
  
  

Considerations for Corporations and LLCs

• Corporations and limited liability companies, or LLCs, provide some protection against creditors pursuing the company's owners to collect claims against the business. This protection is, however, not absolute. If you fail to treat the business as a separate entity by commingling personal and business funds, if you engaged in fraud to obtain credit for the business, or if you failed to pay certain kinds of taxes, called "trust fund taxes," including Social Security and Medicare Tax, the courts may allow creditors to "pierce the corporate veil" and go after you and the other stockholders or LLC members personally.
  
  

Chapter 7 Considerations

• Bankruptcy, particularly Chapter 7 bankruptcy, is a drastic move. A bankruptcy on your record may adversely affect your ability to access credit in the future or to get a job in certain kinds of businesses. It may also affect your ability to qualify for a security clearance, which is important if you are in the military or if you wish to work for companies that deal with sensitive information. Finally, not all debts are dischargeable under Chapter 7. You will still owe many kinds of tax debts assessed within the last three years, for example. If you need the business to continue to function, consider filing under Chapter 11 instead of Chapter 7.