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What forms of bankruptcy are available to businesses?

When a business is deciding whether to go bankrupt or not, there are usually three chapters of bankruptcy that they would be considering. The first is Chapter 7 bankruptcy, a fairly standard form of bankruptcy whether you are a business or an individual. In Chapter 7, liquidation is the process by which the bankrupt entity fulfills its debts, while also clearing out other debts through discharge. For a business, Chapter 7 usually means the end. It is also a good option for companies that don't have significant assets.

Chapter 13 bankruptcy, meanwhile, is usually meant for individuals and not businesses. But a business can be an extension of an individual via a sole proprietorship. In this case, Chapter 13 can be used by a business. This form of bankruptcy will see the business restructure its debts and come up with a payment plan to satisfy creditors.

Bigger companies will often go for a Chapter 11 bankruptcy. This allows the company to reorganize under a new name or new owner, if they so choose. More generally, it just allows the company to buy some time and reorganize itself. While doing so, they will need to put forth a plan that is approved by creditors.

Remember that depending on what type of business you have, the type of bankruptcy you want to file for may not be available to you. As the sole proprietorship/Chapter 13 example illustrates, not every company qualifies for every type of bankruptcy.

Source: The Balance, "What is Business Bankruptcy?," Rosemary Peavler, June 15, 2016

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