We tend to think of corporations as being very different from people – and they are, in a lot of ways. But there are also a lot of commonalities between individuals and businesses too, and one is that both can get into big money trouble. No matter whether you’re an individual or a corporation, if you get yourself into insurmountable debt you have the option of filing for bankruptcy. But there are significant differences in the types of bankruptcy available to each, as well as the rules for qualifying.

When an individual can’t pay their bills, there are two options for filing for personal bankruptcy: Chapters 7 and Chapter 13. If they feel that they just need an adjustment to the amount of time they have available to pay off the debt, they can opt for Chapter 13, which reorganizes their debt by extending their payment terms, or lowering their interest rate, or even reducing their total debt. Chapter 7 is available for those who know they simply will not be able to pay off their debt. They may have to liquidate assets in order to pay some of what they owe to their creditors.

When a corporation can’t pay off their debt, they also have two options, and like individuals they can choose Chapter 7. But if a corporation chooses to file for Chapter 7 bankruptcy that means that they are closing their business down entirely, with no hope of reopening. By contrast, they can choose a Chapter 11 bankruptcy that reorganizes their debts under a plan that represents their own proposal as well as input from their creditors.

Though the options available to corporations and individuals seem very similar, there are some very important differences between the two. The first is that businesses have the ability to get out of contracts with their creditors if both agree to that happening. Individuals aren’t able to do that – if they have a contract to pay student debt, or taxes, alimony, child support, and other kinds of debt, bankruptcy will not let them escape their obligation. Individuals are also required to submit to a “means test” that is not required of corporations. Means tests involve submitting detailed financial information to the bankruptcy court so that it can be determined which of the two available bankruptcy chapters the individual qualifies for. An individual can’t just say that they want to file under Chapter 7: They have to prove that they are unable to pay what they owe.

If you need information about the best option for your financial situation, we can help. Contact us today to set up a time to discuss your situation.