What happens to a business in bankruptcy?

| Mar 17, 2021 | Bankruptcy, Business Law |

When Wisconsin residents don’t see a way out of debt, they have the option of bankruptcy. Bankruptcy helps them eliminate certain debts through repayment under Chapter 13 or liquidation under Chapter 7. However, the debtor may wonder what may happen to their business after filing.

Business under Chapter 7

Debtors commonly file Chapter 7 bankruptcy more than any other type, because it gives them a faster discharge. Sole proprietorships may file under Chapter 7, but they must meet the qualifications. They must list non-exempt assets in the petition for the trustee to sell to pay creditors.

A sole proprietor can get some personal and business debts removed in Chapter 7. While Chapter 7 requires the selling of certain assets, bankruptcy exemptions may allow the business to stay open and keep more assets. However, LLCs, partnership, or corporations don’t receive an official discharge, so they will likely have to close, and they can not use exemptions.

Businesses under Chapter 13 and Chapter 11 bankruptcy

Chapter 13 bankruptcy restructures debts, which allows individuals and sole proprietorships to pay debts over time with a court-approved plan they devise. They need sufficient income to qualify and must not have filed under Chapter 7 or Chapter 13 within the previous four years. Owners don’t have to give up assets as long as they keep payments current.

However, the filer can not file under the business name and must file as a consumer. This is because a sole proprietorship does not count as a separate entity, which means the owner will have both business and personal debts.

Debtors who owe more than the limit in Chapter 13 may attempt to file Chapter 11. While small businesses seldom file Chapter 11, it gives them more control. Under the “debtor in possession” law, the owner has the power of a trustee.

Bankruptcy must carefully be navigated and laws followed to avoid case dismissal. The debtor may benefit from consulting with an attorney to get advice.