Business Bankruptcy and Corporate Debt

Last year more than 43,000 business bankruptcy petitions were filed through the court system. By mid-2009, over 30,000 privately owned businesses filed for protection under the U.S. Bankruptcy Code. If business owners continue filing at the current rate, corporate bankruptcy could increase by nearly 30-percent by the end of the year.

Business bankruptcy affects everyone. When small business owners close their doors the effects are usually contained within community. When corporations and banks file for bankruptcy protection, the fallout can stretch around the globe. Regardless of the size of the business, bankruptcy is rarely beneficial to anyone.

Fortunately, business bankruptcy offers business owners the opportunity to revive a financially-ailing business by restructuring debt. Sole proprietors can seek relief under Chapter 13. This bankruptcy chapter allows debtors to develop a repayment plan which extends for three to five years.

Partnerships, corporations and limited liability corporations (LLC) can file for reorganization of debt under Chapter 11. When businesses petition the court for Chapter 11 protection they are required to repay a portion of debts through a repayment plan which is supervised by a bankruptcy Trustee.

Farmers and commercial fishermen can obtain bankruptcy protection under Chapter 12. Similar to Chapter 11 bankruptcy, farmers and fishermen are allowed to retain assets by establishing a debt repayment plan.

Chapter 7 is used when business owners do not possess the financial means to repay debt. Also known as "liquidation bankruptcy", debtors are required to sell off valuable assets to repay creditor debts. Outstanding balances are discharged; releasing the business from repayment and dissolving the business entity.

Business owners must submit a petition to the bankruptcy court. Currently, no law exists requiring courts to grant business bankruptcy approval. Businesses must undergo specific protocol and appear in front of a bankruptcy judge.

Once a business bankruptcy petition is filed, an automatic stay goes into effect. The stay prevents creditors from contacting debtors or engaging in collection activities. Business owners attend a 341 creditor meeting to present their proposed repayment plan. The plan is then submitted to a bankruptcy judge for approval.

Sole proprietors must undergo the 'means' test which compares their income against their states' median income level. If debtors' income is equal to or greater than the median income, they will be required to file Chapter 13. If income levels are below average, the bankruptcy judge might allow debtors' to file for Chapter 7.

Business bankruptcy should be overseen by a qualified bankruptcy attorney. In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act to stop frivolous bankruptcy petitions. The new bankruptcy laws are complex. If debtors neglect to file specific documents or miss a filing deadline their bankruptcy petition could be dismissed.

It is never an easy decision for a business owner to file bankruptcy. However, if bankruptcy is used properly, business owners can regain control over debts and return the business to a valuable asset that provides benefit to the owner, employees, customers and community.