Coates & Davenport, P.C.

What types of business bankruptcies are available to Virginians?

Sometimes even the best laid plans fall through, and a business in Virginia decides it is in its best interests to file for bankruptcy. There are three kinds of bankruptcies applicable to businesses: Chapter 7, Chapter 11 or Chapter 13. What type of bankruptcy is appropriate depends on how the business is formed.

Chapter 7 bankruptcy is often chosen when a business believes that restructuring the business is not possible or if the business lacks any substantial assets. It is also known as a liquidation bankruptcy. The court will appoint a trustee who will take back the business's assets to pay back the business's creditors. Once this happens, if the business is a sole proprietorship, its debts are then discharged. If the business is a partnership or a corporation, then its debts cannot be extinguished through a Chapter 7 bankruptcy. In either case, if a business files for Chapter 7 bankruptcy, it essentially means that the business is closed for good. Chapter 7 bankruptcy is an option for sole proprietorships, partnerships and corporations.

If a business believes it could continue its operations into the future, then it may choose Chapter 11 bankruptcy. In such a bankruptcy, a reorganization plan will be developed that allows the business to continue running. Like a Chapter 7 bankruptcy, in a Chapter 11 bankruptcy a trustee will be appointed by the court -- it could even be the business itself. The trustee will handle the reorganization. A plan will be filed with the court that will describe how the business intends to pay back its creditors. The creditors are given the opportunity to vote on the reorganization plan. These plans can take as long as two decades to complete. Even the confirmation of a plan can take as long as 12 months. Chapter 11 bankruptcy is an option for sole proprietorships, partnerships and corporations.

Sole proprietorships alone also have the option to file for Chapter 13 bankruptcy. In such a bankruptcy, a repayment plan is arranged that includes information on how the business owner will pay back his or her debts. This plan is then filed with the court. If a business owner's personal property is commingled with their personal property, then a Chapter 13 filing can help protect the business owner's personal assets, such as their home.

In the end, determining what type of bankruptcy to file for is a complex decision. Fortunately, business law and bankruptcy attorneys are on hand to help advise business owners about their options so they can make appropriate choices.

Source: the balance, "What Is Business Bankruptcy?," Rosemary Peavler, Feb. 4, 2017

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