If you’re considering bankruptcy, it’s important to understand the different types. There are two main types of bankruptcy: consumer bankruptcy and business bankruptcy. Within these categories are two different bankruptcy filing options. Let’s begin by looking at consumer bankruptcy.
Consumer bankruptcy offers an individual the option of filing for personal bankruptcy to reduce or eliminate debts. There are two different types of consumer bankruptcy: Chapter 7 and Chapter 13. Under Chapter 13 bankruptcy, your debts will be consolidated, possibly reduced, and a repayment plan will be devised. The repayment period is typically 3-5 years, although this will depend on a variety of different factors. Under Chapter 7, most (or all) of your debt will be eliminated (discharged) and you will begin with a fresh, clean slate.
Business bankruptcy offers a business the option of filing for corporate bankruptcy. There are two main types of business bankruptcy: Chapter 7 and Chapter 11.
Before filing for bankruptcy, determine whether your small business is a corporation, partnership, or sole proprietorship. Corporations, partnerships, and LLCs are legal entities that are separate from their partners, managers, and shareholders. These types of businesses can file Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy. If your small business is a sole proprietorship, it is tied to the owner and cannot legally be classified as a business entity.
Under Chapter 11, the business is “reorganized,” debts are consolidated (some may be liquidated), and a repayment plan is devised. In both Chapter 11 business bankruptcy and Chapter 13 personal bankruptcy, a repayment plan is devised, and debts are consolidated.
Chapter 7 business bankruptcy is known as “liquidation.” In this situation, business assets and debts are liquidated. Unlike an individual who files for Chapter 7, corporations don’t get their debt discharged (eliminated). Instead, a bankruptcy trustee will handle asset liquidation for the business. Chapter 11 business bankruptcy is usually more expensive than Chapter 7 because it is more complex and requires a larger time commitment.