Corporation Bankruptcy vs. Personal Bankruptcy
When faced with debt, both businesses and individuals have the option of bankruptcy. Filing for bankruptcy is a difficult decision to make. However, circumstances often leave both corporations and people with no other option. Sometimes poor circumstances result from a choice like a business putting out an untested product that flops or an individual making a large purchase they cannot afford on credit. Other times, the circumstances are beyond control, such as a bad economy or an unforeseeable catastrophe.
Inherent differences exist between corporate and personal bankruptcy no matter the circumstances. However, a good chunk of the population does not understand the nuances between the two. Here we seek to clarify the main differences between corporation bankruptcy and personal.
When a company does not have the liquidity to meet all debt obligations, or when it cannot function with its debts, it files for corporation bankruptcy. Under chapter XI bankruptcy, the government protects the business while they reorganize. It’s a safe time period for operations to sort its affairs and prepare to re-enter the market. Meanwhile, equity holders give a majority of the control over the business to the government and trustees. Together, they make sure the debt holders come through on their claims.
Corporation bankruptcy grants business time to make cutbacks and other necessary measures that allow debt payment to be organized within the business’s budget. Examples of businesses that filed for chapter XI include Kmart, GM, Delta, the Texas Rangers, and Macy’s.
Businesses file for chapter XI corporation bankruptcy when:
- Shareholders would rather see operations continue rather than cut losses and close.
- They are not necessarily out of cash completely.
- Owners have the means to come out of debt with lean business operations.
Generally, personal bankruptcy designates under either chapter VII or chapter XIII. While small business owners may file for these types of bankruptcy as well, the process for a small business differs from personal bankruptcy. So for the sake of brevity and clarity, we focus on VII and XIII as our basis for “personal bankruptcy.”
Under XII, a debtor is broke– they have no savings and no incoming revenue. So, any outstanding debts they have cannot be paid. At this point, the creditors seize assets such as a car or house.
On the other hand, chapter XIII allows debtors to keep their things while working out a payment plan for the creditor. Generally, payment takes about 3-5 years. Debtors keep their assets as long as they continue to meet the conditions of their agreement.
There are caveats to personal bankruptcy. It cannot eliminate tax debts, student loans, child support, or other legal obligations. Furthermore, bankruptcy ruins a person’s credit for more than a decade. Homes, cars, and other big purchases cost way more– double or triple the interest rates of someone with good credit.
Individuals file for chapter VII personal bankruptcy when:
- They are absolutely out of cash
- They need a clean slate of absolute debt in order to build their credit from the ground up.
- Their debts outweigh the burden of social obligation to pay back creditors.
The Big Differences
There are three large differences between both personal and corporation bankruptcy
1. Means Test
In order to file for bankruptcy, an individual must pass a means test to prove their eligibility. Corporations do not have to prove their eligibility.
2. Legal Obligation
A business may cancel legally binding contracts with creditors if it is mutually beneficial. Legal obligations such as tax debts and child support continue to bind individuals after filing for bankruptcy.
3. Social Stigma
There is an unspoken agreement in our society that we have a moral obligation do everything they can to pay back debts owed. Filing for bankruptcy is an admission that a person failed to meet said obligation. On the other hand, there are no moral obligations for a company other than maximizing the wealth of shareholders. However, bankruptcy ruins a company’s reputation and affects day-to-day operations.
Find a Bankruptcy Attorney
Still unclear about the differences between personal and corporation bankruptcy? Do you have questions about bankruptcy and which avenue you should take? The Law Office of Erica M. Bansmer has the expertise to guide you through your bankruptcy options. Contact our office for a consultation at 209-474-2400.
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