Credit Yogi


What Can I Do to Avoid Going Out of Business?

Businesses often turn to bankruptcy protection to avoid going out of business. When a company files under chapter 11 to reorganize, it continues to conduct business. After bankruptcy it emerges on a more viable footing. Chapter 7 requires the company to liquidate assets to pay creditors. Through the bankruptcy process, the business eliminates debt and sells off any non-performing assets. It restructures long-term debt, and may bring in new equity or financing.

Thinking About Filling Bankruptcy for Your Small Business

What Happens When a Small Business Files for Bankruptcy?

What happens to your small business when you file for bankruptcy depends upon the type you file. Chapter 7 liquidates your assets to pay creditors, resulting most often in closing down. Chapter 11 allows you to reorganize your debt and pay some of your creditors, depending on how much is available for distribution.

Before you decide, consider these points:

  • Are you making money?
    • You started a business to make a profit. If you consistently operate at a loss, closing may be your best choice. However, if you regularly turn a profit and experience a temporary downturn, remaining open and pulling through the slowdown makes more sense. Be realistic—do not just remain open, hoping for the best.
  • Are your business assets greater than your liabilities?
    • When your company is turning a profit and assets exceed liabilities, it makes sense to remain open. By filing chapter 11 bankruptcy to reorganize your debt, your company may return to a more profitable status. If reorganization does not meet your business needs, then consider liquidating assets to satisfy your debt without filing a chapter 7 bankruptcy. While this may cost you less and provide more for creditors. However, when your business is seriously upside-down financially, chapter 7 may be your best bet.
  • Do you hold personal responsibility for the company’s debt?
    • If you are personally responsible for the debts of your company, you may be better off financially continuing to operate until you can negotiate with your creditors. Closing the business may encourage creditors to examine your personal assets, if there are too few to pay your debts. As the business owner, you might also file an individual chapter 7. As a result, you will no longer be responsible for your company’s debts.

Do All Bankruptcies Get Approved?

The courts seldom deny chapter 7 bankruptcy, but it does occasionally happen. In most cases, the attorney overlooked important details, or the petition contained errors. Fraud may sometimes be involved. In cases where an asset’s value substantially exceeds that of the loan payoff, the trustee may possibly allow its sale. Be aware that mistakes made during the process can result in denial of the bankruptcy petition.

Approval for a chapter 7 depends on whether your income is less than required for necessary and reasonable expenses. The debtor (or company) must prove insufficient income to cover monthly payments on outstanding debts. Showing sufficient income to qualify for either a chapter 11 or 13 may result in denial of a chapter 7 petition. It’s up to you to provide your bankruptcy lawyer all the necessary relevant background information required for the filing.

What Is the Difference Between Chapter 7, 11, and 13?

Click to View a Printable Downloadable Bankruptcy Comparison Chart. Comparing chapter 7, chapter 13, and chapter 7 with additional resources and information about lesser known bankruptcy sub chapters.

There are three common types of bankruptcy: chapter 7, chapter 11, and chapter 13. Which one you choose depends on your individual circumstances You need to understand their differences. A personal chapter 7 bankruptcy involves liquidation of all non-exempt assets before discharging any debts. Exempt assets may include the following:

  • Motor vehicles, up to a certain value
  • Reasonably necessary clothing
  • Reasonably necessary household goods and furnishings
  • Household appliances
  • Jewelry, up to a certain value
  • Pensions
  • A portion of equity in the debtor’s home
  • Tools of the debtor’s trade or profession, up to a certain value.
  • A portion of unpaid but earned wages
  • Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account
  • Damages awarded for personal injury

Under certain circumstances, you may be able to keep your home in a chapter 7 bankruptcy. Among other things, your mortgage must be current at the time of filing.

The court appoints a trustee to oversee the sale of your non-exempt property and distribute the proceeds to your creditors. Any debts remaining after the sale of the non-exempt property will be discharged by the court. This typically occurs within 60 days of the filing.

When a Business Files Chapter 11

When a business files a chapter 11 bankruptcy, it applies for protection from creditors to allow them time to reorganize debt. Chapter 11 is open to corporations, sole proprietorships, or partnerships. The personal assets of a corporation’s stockholders, other than their investment in the stock, are safe when filing a chapter 11. However, a sole proprietorship must disclose personal and business assets during bankruptcy filing. In some cases, the personal assets of all partners in a partnership may be used to pay creditors. They may be forced to file for bankruptcy protection. The court assigns a trustee to monitor the progress of the chapter 11 and supervise its administration.

Chapter 13 allows you to apply for protection from creditors while reorganizing debt. Sole proprietorships may also use this chapter instead of chapter 11. The debtor must provide the lawyer with a record of all debts, assets, and income. Depending on the amount of debt, you may only be required to repay secured debt such as car or home loans. Some unsecured debt cannot be discharged. These include taxes, personal injury lawsuits resulting from an accident while you were intoxicated, child support or alimony, fines you owe to the government, and student loans.

Bankruptcy can help businesses restructure their debt

Can I Keep My Business if I File Chapter 13?

Chapter 13 allows you, the owner, to keep all the assets of the business and repay all or part of the debts in a court-designed repayment plan. You protect your business assets while you develop a repayment plan. However, any non-exempt debt is added to the repayment plan. Chapter 13 allows a debtor/business owner several advantages over a chapter 7. These include:

  • Catching up on payments on secured debt such as a house, car, equipment, or any other secured debt.
  • Establishing a plan to pay off priority creditors such as tax agencies and payments for alimony or child support.
  • Reducing the loan balance of some property to meet its value. This is called a “cram down.”

The repayment plan for a chapter 13 allows the debtor up to five years to complete.

Will I Lose My Business in Chapter 7?

Paying off your debts affects your credit score in several ways. The following factors determine how.

  • The highest perc

    In most cases filing a chapter 7 bankruptcy forces a business to close. This occurs because it is impossible to protect property whose ownership is held by a separate entity such as a corporation or limited liability company. In that case the trustee will sell the assets of the business, distribute the proceeds to creditors, and close the business. Businesses rarely file a chapter 7 bankruptcy. Here’s why.

    • Owners can typically take care of closing the business without outside assistance. This saves the cost of attorney and filing fees.
    • A business owner can often get a better price for the company’s assets than the bankruptcy trustee.
    • When a partnership files chapter 7, the personal assets of each partner are at risk.
    • Creditors have a platform where they can air disputes. As a result, the debtor is exposed to possible litigation involving various claims including fraud, a partnership dispute, or even an attempt to hold someone with an ownership interest personally responsible for the company’s debt.

    While filing bankruptcy is seldom a good choice for a business, some sole proprietors who provide a specific type of service may benefit. Certain professions such as accountant, freelance writer, or fitness trainer benefit because the bankruptcy trustee cannot sell your ability to perform your professional service. This works well for owners with very few business assets, since it eliminates all the business debts.

    entage of your score (35 percent) comes from the timeliness with which you pay your bills.
  • Another 30 percent is based on your total debt, both installment loans and revolving credit.
  • The longevity of your credit file makes up another 15 percent.
  • Diversity of account types is important, but it has minimal effect on your credit score (10 percent).
  • Applying for too many new accounts in a short period can also affect your score. Making up 10 percent of your total score, too many hard inquiries cause lenders to doubt your credit stability.

What Qualifies You for Chapter 11?

Typically used for businesses, individuals can also file under chapter 11. For example, an investor may want to reorganize real estate assets or unsecured debts exceeding the limits for chapter 13. The investor might have a property worth less than the mortgage. A chapter 11 filing may allow the petitioner to reduce the remaining principal to that of the property’s value.

Currently, an individual must have unsecured debt of no more than $360,475 to file a chapter 13. If your debt exceeds that limit, you must file under chapter 11. Basically the same as chapter 13, you restructure your unsecured debt and repay it over a specific period as directed by the court.

From a business standpoint, most cases involve restructuring multiple types of debt. These may include priority taxes, unsecured debt, leases, and secured debt.

Can a Company Recover from Chapter 11?

Both individuals and businesses can file chapter 11. Unlike chapter 7 and chapter 13, chapter 11 carries no income or debt limitations.

While filing chapter 7 often guarantees a company’s demise, chapter 11 does not. Chapter 11 allows a company to restructure its debt while continuing to operate. Some companies may fail to recover even after chapter 11. However, many emerge stronger. Developing a reasonable restructuring plan that meets the needs and future of the company provides a roadmap for increased financial stability.

Restructuring helps to lower a company’s monthly expense outlay and may include a reduction in balances. For example, if your company owns a truck worth $5,000, but the loan balance is $10,000, you can petition the court to reduce that balance to the value of the truck. You can further petition to lower the interest rate on assets that are under water.

Filing a chapter 11 bankruptcy does not doom your business. Several companies doing very well today have emerged from chapter 11 or were very close to it. Recognize the signs before you become overwhelmed. Chapter 11 does not indicate failure. Very simply, you may have fallen victim to a downturn in the economy. As a result, you need to regain your company’s profitability.


A sluggish economy often negatively affects many businesses, especially when unprepared for it. When the unexpected occurs, such as during a pandemic, many businesses must close their doors. While the solution to staying in business may be through bankruptcy, the question is which chapter. Chapter 7 generally means your company will close. You must carefully weigh the pros and cons. During a temporary downturn, a chapter 11 can help you restructure your debt and move forward.

Are you trying to decide whether or not to file bankruptcy? To speak to one of Credit-Yogi’s experienced financial consultants, fill out the contact form on the website. Our experts can help you make the right decision. Our website also offers many tools to help you develop a plan that will work for you.

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