Filing for bankruptcy is a stressful and difficult process, but it could be the only viable solution to getting your company’ back on track. Filing for Chapter 11 bankruptcy allows you to restructure your finances while keeping the doors to your business open.
Before filing, it’s essential to understand the implications, mainly how it will affect your taxes.
How Chapter 11 works
Specific steps are involved when a business chooses to file Chapter 11 bankruptcy to reorganize its assets and liabilities. The process typically involves the following:
1. Before even filing, the business must undergo credit counseling within 180 days.
2. After counseling, the business can file a petition in bankruptcy court that includes schedules of assets and liabilities, current income and expenses, contracts, unexpired leases and a statement of financial affairs.
3. Once the petition is filed, an automatic stay goes into effect, preventing creditors from collecting their debts.
4. A trustee may be assigned to oversee the case, and a meeting of creditors is held. The business must file a disclosure statement about its affairs so creditors can make an informed judgment about its reorganization plan.
5. If the court approves the plan, there is a confirmation hearing. After the confirmation, the debtor can start making payments.
After filing for bankruptcy, a business must still file and pay income tax returns. It is also still responsible for paying sales and payroll taxes. If you are a small business owner, you will need to file your 1040. Additionally, the bankruptcy trustee files a Form 1041 for the bankruptcy estate. Corporations are required to file Form 1120. They may also need to file a Form 982 for any debt forgiveness.
Bankruptcy and tax laws are complex. Any company planning to file for bankruptcy should consult someone who can guide it through the process.