Though the public perception of bankruptcy is negative, bankruptcy does not mean defeat. Filing bankruptcy for a small business was created to get business owners back in good financial standing and make getting out of debt attainable.
While large corporations have a systematic process for handling bankruptcy litigation, the process is much more stressful for small business owners. In Illinois, there are two types of bankruptcy laws that small businesses commonly file for: Chapter 7 Liquidation Bankruptcy and Chapter 11 Reorganization Bankruptcy. While both options help business owners consolidate and get out of debts, there are significant differences between the two options.
Chapter 7 Liquidation Bankruptcy
Chapter 7 Liquidation Bankruptcy allows people to shed the burden of endless financial debt by allowing the opportunity to eliminate and consolidate most of their unsecured debt.
It is commonly the right choice for filing bankruptcy for a small business due to its relatively inexpensive fees and straightforward process. The process may require the liquidation of some or all business assets in order to pay creditors and necessitates that the business shuts down. The selling of assets is conducted by the trustee designated by the bankruptcy process, thus alleviating the burden of liquidation for you.
It is important to note that the bankruptcy process only alleviates unsecured debts, which are loans that don’t require collateral, such as business loans and credit card bills. Since secured debts have collateral, the debt owners have the ability to take the collateral, such as the repossession of a car in the event that the car payments are far behind.
Not all debts are able to be absolved by the bankruptcy process, such as taxes. It is important to have conversations with your bankruptcy attorney so that you may understand what debts will be absolved and which will require repayments.
Chapter 11 Reorganization Bankruptcy
While significantly more expensive to enact, Chapter 11 Reorganization Bankruptcy does have several advantages, including the ability to keep your business open while preventing creditors from collecting debts. Additionally, Chapter 11 allows for the reappraisal of secured debts, the ability to renegotiate contracts and debts, and the repayment of unsecured debts and debts to the IRS to have a longer repayment period
While the advantages may seem tempting, the process is unfortunately complex, lengthy, and expensive. Additionally, even after your bankruptcy lawyer creates a restructuring plan, the judge may reject the plan if they determine that it is noncompliant or unrealistic. Furthermore, the court has the ability to impose strict limitations on upper-level employees, and must approve major business actions that are unrelated to the actions of the restructuring contract.
Determining if Filing Bankruptcy for a Small Business is Right for You
Though there is no easy, packaged answer for all business owners, typically small business owners opt for Chapter 7 Liquidation Bankruptcy. While Chapter 11 Bankruptcy can keep a business running, it is substantially more expensive to enact due to the complex litigation involved in reorganization.
If you want to understand how filing bankruptcy for a small business can help your business, schedule a free 30-minute consultation with our team of professionals at Schottler Law here. During this consultation, we will discuss the details of your business and determine which course of litigation best suits your needs.
Mark Schottler of Schottler & Associates is a reputable bankruptcy attorney Chicago is proud to have. Schottler has been practicing probate and estate law since 1996 and is passionate about protecting your assets.