Bankruptcy is a way to extinguish debt or a way to reorganize debt in order to get on top of things. People file bankruptcy because they get so far behind that without some change, they will fall further and further behind without fail. Debts begin to pile up until they are impossible to pay and take on a growth pattern of their own.

A business will often find itself with the same debt problems as individuals. And the bankruptcy laws allow businesses to file for bankruptcy as well. One type of bankruptcy a business may file is a chapter 11 bankruptcy. This is not the only type available to businesses.

Business Bankruptcy and Its Effect on Its Owners

Businesses with “limited liability” are businesses with owners who are not considered the same entity as the business. The business and the owner have separate identities. This is the case with LLCs and corporations.

The law provides that LLCs and corporations provide limited liability to its owners. Certain actions of the owners can break the limited liability protection, such as the mingling of business and personal assets. Additionally, an owner is always liable for his own individual actions, as opposed to the actions of the business or others within the business.

For this and many other reasons, limited liability companies are generally considered the ideal type of business to establish.

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.

Limits on Filing Chapter 11 Bankruptcy

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.