Filing Bankruptcy For Your Small Business

business bankruptcy

There’s a lot of uncertainty in the small business sector in the United States.  Every day, as one small business closes its doors another is founded.  It’s a revolving door that you try your best to avoid, but not everyone can find success.

Bankruptcy is available as a salvaging option for struggling business owners, just as it is available for an individual experiencing financial hardship.  The key is to know when and how to invoke this virtual “get out of jail free” card.

There is more than one way to file bankruptcy in business, and it helps to understand the repercussions and stipulations of each.  Finding legal representation for your bankruptcy will help guarantee that you make the right choices during your hard times.

Here is a brief summary of a few things you should know before considering bankruptcy for your small business.

Consider bankruptcy only if…

You should really only consider filing bankruptcy if the demise of your business will put your personal assets at risk.  When a small business is formed, the way in which it is established will make a difference as to whether or not you are held responsible for the financial troubles of your business.

Most entrepreneurs invoke the power of forming as an LLC (or limited liability entity) versus a sole proprietorship.  Running your business as a sole proprietorship or partnership puts your personal assets at a higher risk should the organization fail.

Be sure to clearly separate your personal finances from that of the business.  If you are lax on proving that they are not one in the same, you may still face personal financial repercussions.

Understand the different kinds of bankruptcy

There are many different kinds of bankruptcy to file, but there are really only three different types you should focus your thoughts around.

Filing Chapter 7Chapter 7 bankruptcy is ideal for those who run a small business as a sole proprietorship.  Filing Chapter 7 is referred to as liquidation. Business owners will choose this route when there is no reason or hope to reorganize the operation and keep it running.

Chapter 7 bankruptcy names a trustee who is responsible for selling off all of the business’s assets to pay off debt.  All the proceeds will go towards the deficit, and the rest of the debt will simply be wiped clean. The business is then disbanded and no longer exists.

Filing Chapter 11 – Chapter 11 is a form of bankruptcy most often used by business owners who do not wish to simply abandon ship.  If you want to buy time to reorganize your business, then you may want to consider filing a Chapter 11 bankruptcy.

Choosing reorganization will also mean that a court-appointed trustee will be looking over your shoulder for a while. Filing Chapter 11 will cost more than Chapter 7, but you’ll have the chance to save the business.

Filing Chapter 13 – Chapter 13 requires a strict repayment plan for all of the business’s debts.  If you’re a sole proprietor, you could be responsible for personally repaying some of the business’s debt.

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