Unfortunately it is all too common for businesses to find themselves struggling with debt. It can be incredibly stressful to deal with a failing business at the same time that creditors, suppliers, and vendors are demanding to be paid. In order to save their businesses and get creditors off their backs, business owners often seek relief, either through help from the government or by filing for bankruptcy.
Government bailout is typically not a debt relief option for small business owners. The government generally only steps in to help a company should its success or failure have a large impact on the economy. If a company going out of business will effect a large number of people through loss of jobs, loss of services, or loss of a particular product, then the government can step in and provide debt relief. For example, if a large power supply company was in financial trouble and their closing would result in people losing their electricity, then the government would most likely step in. The same has been seen in the automotive industry where thousands of people could lose their jobs should the company fail. That many people losing their jobs at once has an impact on the countries unemployment rate and hurts the economy.
Bankruptcy is an option that is more suited for smaller business owners and smaller corporations. A company in financial trouble can file for bankruptcy, therefore having most of their debt relieved. Bankruptcy prevents suppliers and creditors from trying to collect debt from the business. It also relives the business from judgments and protects both secured and unsecured accounts.
Types of Bankruptcy Filing
There are several types of bankruptcy filings including chapter 7, chapter 11, and chapter 13.
- Chapter 13 is usually for individuals but can sometimes be used by sole proprietor ships. Chapter 13 essentially helps the debtor to keep their home while having a payment plan in place to repay their debt.
- Chapter 7 is the most common form of bankruptcy for businesses. Basically the businesses’ assets are liquidated and sold off to repay the creditors. After the business has filed chapter 7 bankruptcy, creditors can no longer go after the business to recover its debt.
- Chapter 11 bankruptcy is usually only filed by large corporations or partnerships. Filing chapter 11 allows the company to form a plan to reorganize the business and petition to have debts reduced and/or negotiated. Chapter 11 filing usually helps the business stay in operation despite the financial difficulties and remain open until they come out of bankruptcy.
Whichever form of businesses debt relief a struggling business turns to for assistance they generally have the same goals. Ideally the business is looking for a way to get creditors to stop harassing them for payment. Secondly, they are trying to look for a way to save the business. No business owner wants to go through the stress of a business failing and will typically do anything reasonably within their means to save the business.