Entrepreneurs in Arkansas don’t like to think about the possibility of bankruptcy, but the truth is that everyone in the business world should have some understanding of how bankruptcy works. It’s always preferable to have a plan for the worst, particularly during a time of economic uncertainty.

Typical business bankruptcies

There are different ways that people and businesses can file for bankruptcy. In the United States, all bankruptcies are filed in federal court. The type of filing is referred to by the section of the legal code it’s described in. When large businesses file for bankruptcies, that’s generally a Chapter 7 filing.

Chapter 7 bankruptcy

In Chapter 7, businesses liquidate. This means that they sell off as many of their assets as possible. Once everything has been sold, the proceeds are applied to the business’s debts. Usually, liquidation will not produce enough cash to satisfy all of a company’s creditors, but this process allows owners to wrap up the business and start over again. For small businesses, there’s an additional option called Chapter 13.

Chapter 13 bankruptcy

Technically, Chapter 13 bankruptcies are designed for individuals, not businesses. However, they can be a great option for sole proprietors who find themselves in trouble. Chapter 13 is not about liquidation; instead, it’s designed for people who have regular income and who want to pay down their debts.

Chapter 13 is all about restructuring and taking time to pay things back. It can be a way of saving a business rather than winding one up. If your small business is in trouble, contacting an experienced attorney to discuss Chapter 13 bankruptcy may be a good idea.