Which bankruptcy option is right for your small business?

On Behalf of | Oct 24, 2020 | Firm News |

As an Austin small business owner, if you are considering bankruptcy, you have two options: Chapter 7 or Chapter 11. Each has its advantages and disadvantages.

Chapter 7

The upside is that you clear most of your debts. You will still need to pay overdue taxes, any money you gained through fraud or money you owe due to negligence, but it wipes out most other debts.

The downside of Chapter 7 is that it usually signifies the end of your business. All the hard work you put in and the reputation you built over the years will go to waste. Your assets will be liquidated to cover your debts. This could include your home.

Chapter 11

This is generally the best option if you want to keep your business going. While creditors may wipe some of your debts, you usually have to repay at least a part of each one. You will need to commit to a repayment schedule decided upon by the creditors and the court. If you owe money to various people, it can be complicated, as they may not agree with each other.

In some ways, Chapter 7 is the easiest option. You can walk away, leaving your problems behind you, and start afresh. However, it is not so good for creditors who may receive nothing, or whatever little your asset sale raises. Thus, it comes with additional restrictions over Chapter 11. First, you must pass a means test to qualify. Second, there is an increased limit on how recently you can have filed before or how soon you can file again.

One final thing to remember is that the success rate for Chapter 11 is pretty low. Some sources put it at less than 15%. Seek legal advice to understand the full implications of bankruptcy for your Austin business and find the right option.