What Is Small Business Bankruptcy?
Small business bankruptcy is a federal legal proceeding that allows businesses to reduce or eliminate debt. Sometimes the business continues to exist after bankruptcy, but other times it does not.
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Function
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Small businesses can file for either Chapter 7, Chapter 11, or Chapter 13 bankruptcy protection. In Chapter 7 bankruptcy the business is dissolved. In Chapters 11 and 13, the business continues to exist even after the bankruptcy proceedings are completed.
Chapter 7 Bankruptcy
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Chapter 7 bankruptcy is referred to as liquidation bankruptcy. The business shuts down, sells its assets, pays as many debts as possible and dissolves. Any remaining debts are wiped away by the court.
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Chapter 11 Bankruptcy
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Chapter 11 bankruptcy is a complicated, expensive process in which a small business can restructure its business activities to pay off debts and ensure profitable operation. Most small businesses will not file for Chapter 11 bankruptcy because it is an expensive process.
Chapter 13 Bankruptcy
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Chapter 13 bankruptcy, also known as debt adjustment bankruptcy, enables a business to create a debt repayment plan. If approved by the bankruptcy court, this gives the business time to remain in operation and repay its debts.
Benefits
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The two biggest benefits of small business bankruptcy protection are the automatic stay and the debt discharge. The automatic stay stops all debt collection activities while the debt discharge allows the bankruptcy court to eliminate or adjust the businesses debts that exist as of the date of filing for bankruptcy.
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