It is a hard decision to file for business bankruptcy, but it doesn’t mean you can never run a business again, that your business goals have been shattered, or that you can’t do anything about it. It is a setback, not the end of the world. Even if you have to claim bankruptcy, you are in good company in 2020.
In this year’s global pandemic, more and more businesses have gone bankrupt and expect more to join the list. Many businesses that were barely afloat before 2020 did not survive this year and even some big-name businesses have also felt the sting of bankruptcy this year. Bankruptcy claims have jumped 43% from June 2019 to June 2020 which should give you a very good idea just how many businesses are suffering.
If you’ve decided to file for bankruptcy don’t just dive into it. Here are some things to take into consideration first.
Types of Bankruptcy
Under The Federal Bankruptcy Code, there are four types of bankruptcies to file for, known as Chapters, 7, 11, 12, and 13. Chapter 12 is related to farmers, so we’ll brief you on the other three chapters.
Chapter 7
In Chapter 7, the debtor is usually looking for liquidation. The bankruptcy claim remains in your credit history for 10 years. Debts that cannot be canceled under this chapter include child support, certain taxes and fines, and the purchase of luxury items.
Chapter 11
Most businesses file bankruptcy under Chapter 11 instead. This is because it allows you to keep your business open while giving you the option of a repayment plan. It is a reorganization plan. Though the business can remain open, some decisions can only be made by a court, such as limiting or expanding business operations. The claim remains on your record for 10 years.
Chapter 13
Chapter 13 is similar to Chapter 11 in that it gives you a chance to pay back your debts within 3 to 5 years. One of the main differences is that almost anyone can file for Chapter 11 while you have to have stable income to be eligible for Chapter 13. The bankruptcy will still go on your financial record for seven years. It’s an option if your home is about to go into foreclosure, for instance. You have to be a bit far-sighted when deciding which chapter suits you best. If you see you have the ability to pay back your debts within a few years, Chapters 11 or 13 will be your most appropriate choices.
Understand the Rules
Be mindful that bankruptcy follows you from state to state. You can be living in San Diego and move to New York; it won’t make a difference because these are federal laws. Bankruptcy is a legal problem so the question is, should you seek legal help in San Diego or New York? For a situation like that, it would be in your best interest to seek out a Bankruptcy Lawyer in San Diego because to file for bankruptcy in a certain state, you must have resided there for a minimum of two years. If you relocate and file within less than two years, your exemption from bankruptcy will be decided by where you stayed 180 days before the two-year filing period.
Back to Class
Before you file, you are obliged to take a credit counseling class. Classes are taken with a counselor approved by the court. The point of meeting with a credit counselor is to see how you could avoid going bankrupt and overcome your debt problems.
You will take two courses. The first one is a 90-minute class taken before you file a claim. Then there is a two-hour class you take before the bankruptcy claim is settled. These courses can be done in person, by phone, or by email. You have to pay for each class but, in some instances, the fees can be waived such as in the case if you receive Social Security Disability checks. Credit counseling classes are taken whether you plan to pay back debts or not. They are meant to assess if you need to claim bankruptcy and are given by a counseling agency. The agency will review your options and may come up with a plan for you to repay debts. You are not obliged to agree with any of their suggestions, but you are obliged to attend. The second course is a debtor education class. The course gives you financial tools to work with, such as giving you advice and tips on budget creation and how to rebuild your credit score after filing for bankruptcy.
Temporary Struggle
Your business might only be going through a temporary struggle. If it’s still making money, but not enough, you could weather the storm and get through it without having to file a claim. It’s also possible that the business assets are more than the liabilities, which would also make sense for keeping the business open. It depends on if the solutions provided for you are feasible or not. In many cases, filing bankruptcy can save the business, if you find other alternatives to pay back a creditor and do not accumulate any more debt. By the same token, if the business has gone completely off track and you don’t have the means to get it back in shape, it will be best to cut your losses early on.
It is Public Record
Anyone who wants to know if you’ve gone bankrupt can find out through public records. Most people don’t care, but those who do are banks and other lenders or creditors. That’s why it could be difficult to receive a loan if you try to apply for one. That’s an awkward feeling, and for many it’s embarrassing.
Bankruptcy is not a crime. You can still travel and you won’t lose everything you own, yet it is a serious matter. Businesses go bankrupt all the time and it’s not always the result of managing the finances and the business poorly. Many times, the economic, social, and political landscapes are too overpowering, especially for small businesses to stay alive, let alone thrive. The decision to file for bankruptcy should be made with the advice and guidance of legal representation.
