Pros and Cons of Bankruptcy for Businesses
It is normal for businesses to take on debt at the beginning. However, getting out of debt can be challenging. When a business faces financial difficulties that it cannot overcome through regular means, bankruptcy can offer a viable solution. Bankruptcy can offer a business an opportunity to discharge or re-arrange debts. Bankruptcy filings are common among businesses. According to statistics, in 2023, there were 18,926 business bankruptcy filings in the United States. This was a 40.4% increase from the 13,481 filings that were recorded in 2022. However, while bankruptcy filing can be a viable option for businesses struggling with overwhelming debt and offers several advantages, business owners must understand that, just as it is with anything else, there are some downsides to filing for bankruptcy. Below, we discuss some of the pros and cons of bankruptcy for businesses.
Pros and Cons of Bankruptcy for Businesses
The pros and cons of bankruptcy for businesses depend on the type of bankruptcy. The primary bankruptcy options for businesses in the U.S. are Chapter 7, Chapter 11, and Chapter 13 bankruptcies. However, Chapter 11 is the most common type of bankruptcy that businesses file. Below is a look at the pros and cons of each type of bankruptcy for businesses.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves liquidating assets to pay off debts. A trustee is appointed to oversee the liquidation of assets. The proceeds are distributed to creditors according to the priority of debts. The following are some of the pros and cons of Chapter 7 bankruptcy for businesses;
Pros
- Allows businesses to liquidate assets and pay off debts
- Allows for the discharge of most unsecured debts, providing businesses with significant relief from financial obligations.
- It is a relatively quick process. A Chapter 7 bankruptcy can be completed within a few months.
Cons
- Businesses usually cease operations and close down once assets are sold off to repay creditors
- Assets are lost, which can include personal assets if the owner has pledged them as collateral
- The business’s and even the owner’s credit ratings can be significantly impacted
Chapter 11 Bankruptcy
This option allows the business owner to restructure the business’s debts. The following are some of the pros and cons of Chapter 11 bankruptcy for businesses;
Pros
- Businesses can continue operating while restructuring their debts
- Businesses can renegotiate terms with creditors, reduce debt, and reorganize financial obligations
- Businesses can propose a plan that addresses various financial issues, such as renegotiating contracts and leases
Cons
- The Chapter 11 process can be expensive
- Chapter 11 is a complex and lengthy process requiring detailed financial reporting and court oversight
Chapter 13 Bankruptcy
This option is available to sole proprietors. It involves reorganizing debts and paying them back over three to five years. The following are some of the pros and cons of this option for businesses;
Pros
- Allows the business to retain assets and keep operating
- Provides a repayment plan to pay off creditors over three to five years
- Allows for the consolidation of business and personal debts into one repayment plan
Cons
- Only available to sole proprietors
- Requires regular payments, which may strain a business
- May not eliminate all debts, and some debts must be paid in full
Contact Our Deerfield Beach Bankruptcy Lawyer
Speaking to our skilled Deerfield Beach bankruptcy lawyer at the Law Office of Adam I. Skolnik, P.A., can help you understand what bankruptcy might mean for your business’s future. Contact us today to schedule a consultation.
Source:
uscourts.gov/news/2024/01/26/bankruptcy-filings-rise-168-percent#:~:text=Business%20filings%20rose%2040.4%20percent%2C%20from%2013%2C481%20to%2018%2C926%2C%20in%20the%20year%20ending%20Dec.%2031%2C%202023.
