How Is Personal Bankruptcy Different Than A Business Bankruptcy?

Filing for bankruptcy is a last resort for individuals or companies struggling to pay their bills. While the concept of filing for bankruptcy is the same for both groups, the actual process of filing for and the ramifications of a bankruptcy are different for an individual are different than for a business. What are the differences between a personal bankruptcy and a corporate bankruptcy?

Individuals File For Chapter 7 or 13 Bankruptcy

An individual can file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy allows a debtor to completely discharge their debts. In other words, a debtor who has a Chapter 7 bankruptcy approved will no longer have any obligation to pay his or her creditors.

Chapter 13 bankruptcy sees a debtor liquidate certain assets with the funds used to pay off their creditors. Additional payments are then made to creditors over a period of up to 60 months. If all payments are made on time, the debts are wiped away and the debtor is no longer obligated to pay their creditors.

Chapter 11 Bankruptcy Is Used For Business Bankruptcy

Corporations will file for Chapter 11 bankruptcy to protect themselves from their creditors. Contracts with union employees, vendors and other suppliers will be temporarily suspended until new terms can be agreed upon.

During the bankruptcy process, the corporation will continue to operate as usual. A bankruptcy liaison will be appointed to deal directly with the court trustee overseeing the reorganization. During a period of several months, assets may be sold to help the company become leaner and stronger financially.

What Are The Consequences Of Filing For Chapter 7 or 13 Bankruptcy?

An individual debtor who files for Chapter 7 bankruptcy will see his or her credit score drop significantly. The bankruptcy filing will be reported to lenders for the next 10 years with no exceptions. This is the only item that will be reported on a credit report for more than seven years.

Debtors who file for Chapter 13 bankruptcy will take less of a credit hit because they are still paying their creditors. The filing will be reported on their credit reports for the next seven years. Depending on the overall health of the economy, it may be easier for those filing for Chapter 13 bankruptcy to get loans in the near future.

What Are The Consequences Of A Business Filing For Chapter 11 Bankruptcy?

For corporations, the impact of a bankruptcy filing can be minimal. Assuming that the company successfully reorganizes, it can emerge from bankruptcy within 18-24 months as a strong entity that makes a healthy profit. While select top executives may be relieved of their duties, the company as a whole may not be adversely affected by a managed bankruptcy.

What If You Are Filing For A Personal Bankruptcy Because Of A Failed Business Endeavor?

Unfortunately, sole proprietors and partnerships are not treated as separate entities under the law. Therefore, you may be forced to file for bankruptcy as an individual if your company fails. This means that assets such as your house or car could be foreclosed upon or liquidated to pay outstanding business debts. The best thing to do is to find a bankruptcy attorney in your area who can help you through such a complicated process.

Bankruptcy is never the goal for an individual or corporation. However, bankruptcy allows a person or a business entity to reorganize debt and satisfy creditors without losing everything. While it may sting initially, filing for bankruptcy can help individuals and businesses become financially stronger in the long run.

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