Bankruptcy Filing for Incorporated Entity

An incorporated entity can file for bankruptcy under Chapter 7 or Chapter 11, but a business cannot file under Chapter 13.

Chapter 7

When an incorporated business files for bankruptcy protection under Chapter 7, the business is liquidated, the assets are sold and the proceeds go to the unsecured creditors. Owners of a small business that has incorporated or formed as a limited liability company (LLC) often have a choice to make because there are two potential bankruptcy debtors: the owners personally and the business entity. You have the following options:

• File as an individual, and leave the business intact.

• File as an individual, and also have the business entity file separately.

• Have the business entity file and not file as an individual.

One large downside to taking a business entity through Chapter 7 is that you have to use an attorney. Even if you are the sole owner of the entity, you can’t represent it in the bankruptcy court.

Chapter 13

You cannot file a Chapter 13 bankruptcy on behalf of a corporation, limited liability company (LLC), or partnership as such. If you want to file a reorganization bankruptcy in that situation, you must file a business Chapter 11 bankruptcy.

Chapter 11

Although business entities don’t qualify to file Chapter 13 bankruptcy, they certainly can file under Chapter 11. Unfortunately, Chapter 11 bankruptcy is hideously expensive because of the need for both intensive and endless negotiations with secured creditors and creditor committees. Still, if you have a going business and the ability to raise cash in the range of $100,000 or more, Chapter 11 may be a way to save it. Chapter 11 bankruptcy is ordinarily used by financially struggling businesses to reorganize their affairs and their debt load in order to remain in business. A Chapter 11 bankruptcy is typically much more expensive than a Chapter 7 or 13 bankruptcy. Chapter 11 bankruptcy helps a business stay afloat by encouraging negotiation and compromise by all concerned so that the business can keep going and at least pay the creditors something as opposed to a Chapter 7 liquidation, in which creditors may get nothing.

Getting Legal Help

Incorporated businesses wanting to file for bankruptcy protection should consult an experienced bankruptcy attorney. The attorney can advise on the most suitable bankruptcy chapter.