While there are many types of bankruptcy filings, Chapter 11 is a way to reorganize in order to be able to pay debt, rather than a way of extinguishing debt. It is important to first determine what types of bankruptcy may be available to you and next what type is best for you.
The law provides who can file what type of bankruptcy, under what circumstances, and when. You will play a great role in determining what is best for you or your business after that.
Personal Liability in Business Bankruptcy
When a business files a Chapter 11 bankruptcy, there is a great likelihood that the individuals – the owners or shareholders – will not personally be under siege. Whether an individual owner’s assets are at stake in a bankruptcy will depend on the type of business, how it is structured, and whether the owner has maintained that structure without fail.
LLCs and corporations provide what we call limited liability to businesses. Every person is always liable for his or her own acts. Limited liability protection prevents business owners from being liable for the acts of others, or others in the business.
In order to obtain this limited liability, owners must keep personal and business finances separate. They must treat themselves and their business as separate entities. If they do, they will maintain the limited liability provided to LLCs and corporations which will extend to bankruptcy proceedings as well – the bankruptcy of the business does not affect the owner’s personal financial assets.
On the other hand, businesses like sole proprietorships, where the law provides no limited liability protection, also have no limited liability in the bankruptcy proceedings of the sole proprietorship – the personal assets of the owner are not separate from those of the business.
Limitations of Filing Chapter 11
An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e).
In addition, no individual may be a debtor under chapter 11 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.