What is chapter 7 bankruptcy and how it affects your business?

Chapter 7 bankruptcy is the most common type of bankruptcy filing and is also known as liquidation – converting assets into money. If a debtor files for chapter 7 bankruptcy, all his non-exempt property is sold and the proceeds of the same are distributed to the creditors. Most debts would be discharged within months of filing a bankruptcy petition. This is also one of the faster way of starting your business afresh. The court not only appoints a trustee but also creates a “bankruptcy estate”. Mostly, a chapter 7 trustee is responsible for selling the assets and distributing the proceeds to the creditors, after paying off the administrative and legal expenses. But practically, after bankruptcy, the business is over. However, life gives you a second chance. After bankruptcy, you can always start a new business and even your existing business can take a new turn. Although the new business may operate under the same name as the previous one, it is a better idea to start afresh with a new identity. This will prevent any negative credit information from hampering your new business.

Opening a new business after bankruptcy

Bankruptcy remains on an individual’s credit report from 7 to 10 years. Getting a loan during this time frame might be difficult but not impossible. Generally, all business loans need a personal guarantee from an officer of the business. The credit rating of a person is used as the basis for approval or rejection of a business loan. Following are a few tips to get a business loan after bankruptcy:

• Accounts Receivable Loans

In order to survive each and every business has to have some income. They offer terms to clients whereby they purchase a product but pay for it nearly 90 days later. This delayed income is called accounts receivable. These loans are based on the income of a business and so, a business owner’s personal credit is not taken into consideration.

• Equipment loans

In a business that sells a product, there is equipment that is used in the production of that product. This equipment is generally highly customized for the business and may cost millions of dollars. If a business owner has filed for bankruptcy he can use this equipment as collateral for the loan to the new business. The basis for the loan will be the value of the equipment and not the business owner’s credit status.

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1. Things to Know About Filing for Bankruptcy
2. Types of Bankruptcy
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There are different types of bankruptcy to apply for (actually, these types are also called chapters). Depending on what situation you are in, filing for bankruptcy will always provide you financial help.

Do not mistake this financial help for charity though, because the government will conduct a background investigation if you really are in need of this kind of assistance or not. Once the government found out that you are lying in any way to hide your assets, transfer your money to your friends or family, is still employed but declared yourself to be unemployed or intentionally concealed inheritance, business or any source of possible income, things will really go ugly and your chance of having the government on your side to help you will turn the other way around!

The merciful process of filing for bankruptcy is an angel for individuals or companies that no longer have the financial ability to pay for the bills they owe. In order for people in need of financial assistance to survive despite the fact of financial insolvency, the government will offer types of bankruptcy to opt for.  Whether it’s temporary or permanent, the government will always offer a hand to lure someone out of insolvency.

Here are the three (3) types of bankruptcy that is commonly applied for by firms and individuals:

Chapter 7 is the most commonly applied for and is also called “straight bankruptcy”. In this case, the debtor’s assets are sold to pay the creditors. In filing this type of bankruptcy, some of the debts will be eliminated so the original debt will no longer be paid in full as ordered by the government. Because of this scenario, a debtor who files for bankruptcy will face difficulties in applying for a new line of credit in a couple of years after filing.

Chapter 13 is debt restructuring exclusively for individuals. Here, debts are not paid off; instead a payment plan is being set to allow the debtor to pay his debt in the most convenient way as far as his budget is concerned. Payment plan can last from 3 years to five years of repayment provided that certain criteria are met.

Chapter 11 is almost similar to Chapter 13 only that this type of bankruptcy offers assistance to companies and corporations who are facing insolvency (not only limited to individuals). This type of bankruptcy can be filed whenever it is necessary provided that there should be monthly instalment payments as agreed with the creditor.

Related posts:

1. Things to Know About Filing for Bankruptcy
2. Credit Cards after Bankruptcy
3. Setting Up a New Business After Chapter 7 Bankruptcy