Are you an SME (Small Medium Enterprise) owner? And, is your business facing financial distress, and are you considering filing for bankruptcy? If so, there are several different options, including business rescue, to consider before filing for bankruptcy.
It is also important to note at this juncture that most cases of business bankruptcy are not caused by reckless, out of control spending, but financial hardship. And, when global pandemics like the current coronavirus outbreak occur, then it becomes incredibly difficult for small businesses to survive the socio-economic consequences.
Furthermore, US bankruptcy statistics show that the declining trend in business bankruptcy filings continued from its 2010 highs. There were circa 1.6 million bankruptcies filed in September 2010, including both business and private filings. These figures have continued to decline to just over 772 646 total bankruptcies in March 2019. Of these figures, only 22 157 where business bankruptcies. This figure is also down from a 2015 high of 26 130 companies who filed for bankruptcy.
Therefore, the question that begs is how do you solve your business’s financial challenges?
Bankruptcy: A comprehensive definition
Before we answer this question, and to understand the essence of the financial and legal term, let’s consider the following definition:
Bankruptcy, as noted by debt.org and echoed by a bankruptcy lawyer in Toledo, is a “court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses who can’t pay their bills and decide whether to discharge those debts so they are no longer legally required to pay them.”
In other words, if your company is unable to meet its financial commitments, irrespective of the reason why, you can file for bankruptcy.
Types of bankruptcy
The US federal civil law offers the following options when it comes to liquidating your business:
Chapter 13 bankruptcy
This option is primarily a business reorganization process where small businesses (and individuals) go through a debt restructuring process. Essentially, reorganization and not total liquidation is the goal.
In order to qualify for this option, you are required to submit a repayment plan with the bankruptcy court. This plan must contain the details on how you plan to repay your business debts and creditors. The repayment amounts depend on how much your business earns.
Chapter 11 bankruptcy
The fundamental difference between Chapter 13 and Chapter 11 bankruptcy is that when filing for Chapter 11 bankruptcy, you submit a business rescue plan where your business continues to operate under a court-appointed trustee.
As part of this application process, the company must file a detailed explanation of how it will deal with its creditors. Consequently, this will allow the company to terminate business contracts, equipment leases, repay a part of its debts, and discharge other debts. The raison d’etre behind this plan is to return to profitability.
Chapter 7 bankruptcy
The salient point of this option is that all of the company assets are liquidated and sold off to pay the business’s creditors. This option is usually chosen when there is no chance of successful reorganization and rehabilitation. In other words, the company will never become profitable.