Nearly 400,000 business bankruptcy petitions have been filed through federal bankruptcy districts within the previous twelve months. According to BankruptcyData.com, an estimated 1 million corporations will seek financial protection by the end of 2010.

Business bankruptcy has far-reaching effects. When independent business owners close their doors, entire communities can be affected. When corporations file for bankruptcy, the fallout can extend across the country or become global. Consider the immense ramifications that occurred when numerous banks filed for bankruptcy. Jobs were lost and thousands of investors lost their entire life savings.

On the flip side, business bankruptcy can help failing businesses reorganize debts and return to a viable business. Businesses in need of debt restructure will need to work with a business bankruptcy lawyer. The process is complex and business owners must abide by guidelines set forth in the Bankruptcy Abuse Prevention and Consumer Protection Act.

Sole proprietors can seek relief under Chapter 13. This bankruptcy chapter requires business owners to develop a repayment plan which typically extends for three to five years. Corporations, Limited Liability Corporations (LLC), and partnerships must submit debt reorganization petitions under Chapter 11. Both bankruptcy chapters are supervised by a U.S. Trustee.

Commercial fishermen and farmers are required to file under Chapter 12 bankruptcy. Similar to Chapter 11, farmers and fishermen are allowed to retain business assets by developing a debt repayment plan.

When business owners are financially insolvent and unable to repay debts they may be allowed to file Chapter 7. Also known as liquidation bankruptcy, this chapter requires business owners to sell valuable assets to repay creditor debts.

Outstanding balances are discharged through the court and corporate entities are released from debts by dissolving the business entity. The new bankruptcy laws set forth in BAPCPA rarely allow business owners to obtain debt discharge through Chapter 7.

The first stage of business bankruptcy requires owners to file a petition through local courts. Once the petition is filed, an automatic stay goes into effect which prevents creditors from contacting debtors or commencing with collection action.

Within a few weeks, business owners attend a 341 creditor meeting. Debtors are given the opportunity to work out a payment plan with creditors and explain the circumstances which have caused their business to fail. If creditors do not attend the 341 meeting, they must submit their request for debt collection to the court within 30 days. Afterward, the payment plan is submitted to the bankruptcy judge for review.

Sole proprietors are required to undergo the ‘means’ test which compares their income against their states’ median income level. When debtors’ income is equal to or greater than median income levels, they are required to file Chapter 13. If income falls below median levels they might be allowed to file for Chapter 7.

If debtors neglect to file specific documents, miss a filing date, or do not comply with Chapter 13 payments, they can fail out of bankruptcy and lose protection from the court. Failing out of bankruptcy allows creditors to commence with collection action including foreclosure, repossession of business assets, and obtaining court-ordered judgments or property liens.

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

Author Bio: Simon Volkov is a private investor who provides numerous business bankruptcy, personal bankruptcy, and bankruptcy alternatives information via his website. Investors are encouraged to subscribe to Simon’s investment newsletter to locate businesses for sale and investment opportunities at www.SimonVolkov.com.

Category: Finances
Keywords: business bankruptcy, chapter 13, chapter 11, chapter 7, chapter 12, new bankruptcy laws