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Filing Bankruptcy - How to File Bankruptcy

Filing Bankruptcy

Bankruptcy is a process set up by the federal bankruptcy laws to provide individuals and businesses a "fresh start" when they are unable to pay their bills. The process of filing bankruptcy and going through bankruptcy is administered under federal bankruptcy rules by a special bankruptcy judge who helps the business and its creditors work through the issues involved. Bankruptcy courts are set up in judicial districts across the U.S.
In a 1934 decision, the U.S. Supreme Court set out the goal of bankruptcy:
Filing bankruptcy gives the debtor

a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

The release from debt is called "discharge," in which the bankruptcy court determines the debtor's eligibility and sets up a process for relieving the debtor of the requirement to pay certain debts and describing what creditors must do to collect from the debtor. In liquidation bankruptcy proceedings, the secured creditors (usually the bank) are paid off first, with the secured assets being sold to satisfy the liens. Then unsecured loans from creditors are paid from the sale of other assets. Finally, if there is anything left after all creditors have been paid, stockholders might receive a return on their investments.

What’s the difference between personal bankruptcy and business bankruptcy?

Question: What’s the difference between personal bankruptcy and business bankruptcy?

Answer: When we talk about small business bankruptcy, there's not much difference between personal bankruptcy and that of a small business.
If a person's business is a sole proprietorship or a partnership, legally, they are their business, so when they face the prospect of bankruptcy, all their assets are involved and the bankruptcy procedures are the same. In other words, the assets of the business cannot be held separate from their personal assets, so a small business bankruptcy is in effect a personal bankruptcy.
Small business bankruptcy is different for incorporated businesses, because corporations are independent legal entities. Running an incorporated business gives a small business owner liability protection; it is the business' assets that are forfeit, not the individual's.
The bankruptcy procedures are essentially the same, however; the company is forced into or voluntarily seeks bankruptcy protection; all of the company's assets are turned over to the Trustee in Bankruptcy who sells them and distributes the funds to the creditors.
See The Bankruptcy Process in Canada for a more detailed explanation of bankruptcy procedures.