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Economic downturns have a far reaching and long lasting impact on all types of businesses. Consumers become budget conscious out of necessity and reduce or eliminate spending on luxury items. Discretionary spending gradually ceases as inflation rises and the economy slides into characteristics of a recession. For many business owners, the hard financial times lead to questions of the future. Even the most successful entrepreneurs struggle with thoughts of bankruptcy.

Difficult Decisions

When business owners face financial challenges, they are likely to consider all solutions. The first step is usually to cut costs such as overhead, inventory, and even payroll. When even those measures are not enough to make ends meet, the leadership team may consider a more drastic approach.

Types of Bankruptcy

The three most common forms of bankruptcy for individuals or businesses are: Chapter 7, Chapter 11, and Chapter 13. Although there are additional options available and specific variations within each chapter, these are the primary focus for our purposes. Chapter 7 bankruptcy aims to eliminate debt by cancelling them completely or selling assets to repay creditors in full or at a discounted percentage. Chapters 11 and 13 bankruptcy solutions aim to restructure or reorganize debt. The repayment plan generally requires a combination of debt restructuring and relinquishing assets and is overseen through a federal bankruptcy court.

Legal Representation

Court ordered bankruptcy programs require either a Court appointed trustee or private legal counsel. Most business will be required to forfeit most, if not all, of their physical assets in the process of their bankruptcy. Certain assets may be retained when filing a reorganization bankruptcy, such as Chapter 11 or 13. If the business owner intends to remain open during the financial hardship, they may opt for a reorganization plan. Business operations may need to be downsized or relocated in order to remain open. The leadership team will determine if only the business entity, such as a corporation or LLC, is filing bankruptcy, or if individual owners will also file. Individuals who file bankruptcy can do so on behalf of the corporation, but not as the corporation itself.