Bankruptcy is basically used by individuals and businesses alike to rid themselves of debt that will likely remain unpaid and restore them to a clean state of financial affairs. However, there are major differences between an individual filing for bankruptcy and a business doing so. For one thing, a business and individual will file under different chapters.
Filing for Personal Bankruptcy under Chapter 7 or Chapter 13
Individuals who file for Chapter 7 bankruptcy usually have no hope of repaying their mounted debt. Typically, these individuals are low income earners and bankruptcy is the last solution for them to eliminate their debt.
Someone who files for Chapter 13 bankruptcy have income and can repay debt through a payment plan, mostly put in place for management. These individuals may have improved their financial situation after declaring bankruptcy or are struggling making payments but are not completely without money.
When Businesses File for Chapter 7 or Chapter 11
Business can also file for Chapter 7 bankruptcy, but the company then becomes dissolved rather than reorganized.
Chapter 11 allows businesses and corporations to either reorganize or liquidate their assets to pay off their debt. Usually, a business will attempt reorganization to pay debt. At first, the debtors get to choose how the business will reorganize, but after a decided time has passed, a business can propose new plans of reorganization. The creditors still have to vote and approve of their plan.
Most people opt for filing for Chapter 7 or Chapter 13 bankruptcy as individuals because Chapter 11 is pretty complicated. Although, they may file under Chapter 11 if they wish.
More Differences between Filing for Personal and Business Bankruptcy
One of the major differences between a personal and business filing for bankruptcy is the test of means. A business does not have to undergo this test when they file under Chapter 11, but individuals wishing to file under Chapter 7 or Chapter 13 must prove they are in monstrous debt in order to determine eligibility.
A business can cancel a contract with any creditors if it would be financially viable to do so. Individuals don’t have that option for debt exempt from bankruptcy like student loan debt and other types of debt.
Seek Legal Assistance
Regardless if you are filing for personal or business bankruptcy, consider consulting a bankruptcy lawyer Melbourne, FL trusts in the area before filing. Bankruptcy law is rather convoluted and there have been changes in recent years that have heightened the complicated nature. Hiring a lawyer will bring you a better understanding of what to do–even deciding if filing at all is the right thing to do.
Thank you to our friends and contributors at Arcadier & Associates for their insight into business and bankruptcy.