Business bankruptcy occurs when a business is unable to pay its debts or if its creditors are concerned about the financial situation of the business. The creditors might start the bankruptcy proceedings to seek debt repayment or force the business owners to seek protection from creditors through filing for bankruptcy. The owner of a limited liability company has protection against the debts incurred by the debts while a sole proprietorship is in great danger of his possessions in case of a bankruptcy suit. The good news for a sole proprietorship is that it is entitled to relinquishing it debt obligations to the creditor. Corporations do not have such a luxury.

There are many laws regarding business bankruptcy and they are differentiated according to chapters. The most popular is Chapter 7 of the bankruptcy code of the United States constitution. Most people file Chapter 7 because of its relative ease to achieve approval compared to the other chapters, such as Chapter 13. It is easier to be approved after filing Chapter 7 bankruptcy because it offers a greater chance for the creditors to recover part, if not all, of their debts within the shortest time possible. In this chapter, the debtor might agree to surrender any valuable possessions he might have to have them sold to pay some of the debt.

If, for example, the business owns some real estate, cars, or other valuable items, they might be sold and the proceeds shared among the creditors. In exchange, all the debt is wiped off and the debtor can start anew, although the state of bankruptcy can last up to 10 years according to the suit. This might be too harsh for some businesses that might not want to sell off their property to pay debts. Therefore, they might prefer to file Chapter 13 of the bankruptcy code. Chapter 13 is suitable for businesses that are experiencing financial problems due to a temporary setback, and which have the ability to pay their debts once the situation has been resolved.

Other laws relating to business bankruptcy include chapters 11 and 12. Chapter 11 is more similar to Chapter 13 as it allows for reorganization of the company until it is stable enough to operate again and pay its debts. Chapter 12 mostly deals with farming fishing families and offers reprieve due to the tightened laws on agricultural produce. Before filing for a voluntary bankruptcy petition, the business owners must consider all the options available as well as the pros and cons of being declared bankrupt.

While bankruptcy might provide temporary relief from creditors who might be demanding payment of their debts, it exposes the business to financial isolation and discrimination. Financial institutions might fear lending money to the business and the business might collapse without extra capital injected into it. Other businesses might as well refuse to provide their goods on credit to a bankrupt company. The negative reputation will eventually get to the consumers who might shun purchasing the company’s products. Unfortunately, bankruptcy negatively affects one’s credit report that can last for several years.