Bankruptcy is a word that many people are afraid of. The idea of losing your money and having to owe is a scary thought indeed, but one thing many people who are concerned about bankruptcy are not sure about is what kinds there are and how they work.
This is understandable for many because the looming idea of bankruptcy is usually not a thought that’s present day-to-day – until it is. Knowing the types of bankruptcy, along with how it works, and what the consequences are can potentially save you from a financial downturn in your personal or business life. It is good to be on top of these things, and this information will help you understand the basics of bankruptcy.
Small Business Bankruptcy
More often than not, we consider bankruptcy to happen to businesses, which is true. What we do not know is how it affects smaller businesses that cannot recoup from debt as big ones do. However, it is entirely possible because small business bankruptcies are similar to a personal bankruptcy (more on this later). The reason is those small businesses, if unincorporated, acts as an asset due to the ownership of the proprietor or partnership. This means that assets of the business are considered your assets in the repayment of a debt from the business.
Small business bankruptcy has four different types of discharges, like personal bankruptcy, that are resolutions of the debt.
1.Absolute
2.Conditional
3.Suspended
4.Refused
More on this later, but there are criteria as well for bankruptcy when determining your assets. This is referred to as ordinary administration bankruptcy because small businesses will likely exceed $15 000 in assets. Paperwork, creditor meetings, and potentially filing for a consumer proposal.
Personal Bankruptcy
This type of bankruptcy is more common for most people because it involves their finances rather than business ownership, which takes up a smaller fraction of everyday people. As stated, personal and small business work in similar ways. One of the ways of how it works is that there must be criteria on your end, which are often a loss of income, debt owed to creditors above $1000, debts are worth more than your assets or you cannot pay bills due to your debt. These reasons are why you would need to file for bankruptcy.
Going back to small business bankruptcy, the four discharges that relate to resolving bankruptcy. These are absolute (relief from all outstanding debts), conditional (set conditions to be relieved of outstanding debts), suspended (absolute discharge will occur at a later set date), and refused discharge (work with your trustee to achieve absolute discharge, or reapply for a later date). This all means that there are set reasons and parameters to bankruptcy because it is not all equal.
With a small business, there is ordinary administrative, whereas personal it is usually summary, because the assets do not exceed that $15 000 when sold. You would not need to advertise your bankruptcy legally, but you could still be subject to asset seizure. Smaller bankruptcy claims do not go through this because of that asset limit but the consequences are there.
Corporate Bankruptcy
The least common of the three main types of bankruptcy is corporate because of the fact that owning a corporation is less common. The purpose of corporate bankruptcy is to seize assets because of debt rather than focus on corporate business owners. This works differently because the corporation likely has assets exceeding the minimum and can cover the cost of outstanding debts for the creditors.
Corporate owners can use their assets as collateral if they feel that it can cover the costs. Homes, properties, investments, mortgages, etc. are common ways to do so. This means they are forfeited as per the bankruptcy laws. Corporate bankruptcy involves significantly larger sums of debt or capital and the consequences relate to business ownership. In terms of personal or small business bankruptcy, the more common types, credit scores, and tax information is hurt, and not the combination of credit and tax filing and asset seizure for a business.
Bankruptcy, as you can now see, is not something to mess around with. It scares people and for good reason. If you can avoid having to file for it that is preferred but sometimes it happens. What’s most important is knowing what it could mean for you in the future if you ever had to file for bankruptcy. These are 3 of the most common types of bankruptcy and what their consequences are, and any information is useful to help you protect your finances.