When a business is overwhelmed with debt, you can file for business bankruptcy in order to get the business back on its feet. The effects of filing bankruptcy will differ depending on which chapter you file under.
- Elimination of debt. Business bankruptcy allows your business to eliminate debt in two ways. Chapter 7 allows for the cancelation of debts, court judgments or medical bills for the business owner. Chapters 11 and 13 allow for you to come up with a plan to repay your debts.
- Debt repayment and business reorganization. Chapter 11 and Chapter 13 allow businesses to repay their debts and continue to run thereafter. Under Chapter 11, the business can reorganize and repay its debts over time. Chapter 13 requires the business to repay its debts within three to five years.
- Liquidation. If you are not interested in running your business any longer and would simply like to clear your debts, you may choose to file for bankruptcy under Chapter 7. This allows you to close your business and sell property belonging to the business to pay off the debts.
- Credit reports. Businesses have their own identity if they are incorporated. When you file for bankruptcy, it should not affect your personal credit report. However, your credit score will be affected if you signed a business credit card agreement. Your credit report will also be affected if you took a business loan under your name or signed as a guarantor and therefore assumed personal responsibility for the business debt.
Long Term Effects of Business Bankruptcy on Credit score
If you filed for business bankruptcy it will affect your credit score for up to ten years. The length of time for which your credit will be impacted will depend on which Chapter you used to file bankruptcy.
- Chapter 7. If you filed for Chapter 7 bankruptcy, the information about the bankruptcy will appear in your personal credit report for 10 years.
- Chapter 11. If you filed for chapter 11 bankruptcy, the information will appear on your credit report for a period of seven years.
The laws that govern business bankruptcy are complex. Each bankruptcy case is unique and should be treated as such. It is therefore wise to seek the assistance of an experienced bankruptcy lawyer to evaluate your particular situation and guide you through the entire process. This will help you understand your options and choose the best path for you personally and for your business.