Bankruptcy is not a solution for every business’s financial situation. If you have one or two outstanding debts, working with your creditors is a far better solution than bankruptcy. However, if you have several red flags in regards to your finances or a business that is just not viable, then filing for bankruptcy could make a good deal of sense. Read on to discover what bankruptcy can and can’t do for your small business and when a business should consider alternatives to bankruptcy prior to filing.
Bankruptcy isn’t merely being broke. Bankruptcy is the legal process in which people or businesses that cannot repay debt seek relief for some or all of their debts to creditors. An important aspect of the bankruptcy process is that the debtor — the person or business filing for bankruptcy — gains what they often call a “fresh start,” while the creditors are treated in a fair manner in regards to the debt owed to them.
A good way to figure out if bankruptcy makes sense is to assess your financial situation. This involves some self-reflection and asking yourself key questions about your business, such as:
Answering “yes” to just one of these is an issue, but not one to be solved with bankruptcy. If, however, you’ve answered “yes” to several of these questions, then you may want to consider filing for bankruptcy as an option. Perhaps the biggest benefit to filing for bankruptcy is the sense of relief, or clean slate, that the debtors feel afterward. Declaring bankruptcy is a scary prospect, but it can be a necessary and good solution if your finances are in such bad shape. Bankruptcy laws exist in the U.S. both to assure creditors but also to enable debtors to admit they can’t do it alone and seek help without completely destroying their livelihoods.
In business bankruptcy, a business that can’t repay its debts files for bankruptcy and, under the guidance and protection of the bankruptcy court, either eliminates the debt or restructures how it is repaid. Business bankruptcies are often described as liquidations or reorganizations. For small businesses, there are three applicable types of bankruptcy:
Each type pertains to certain business circumstances, so they differ from one another in key ways. Keep reading to learn more about each type of bankruptcy to determine which type is best for your situation.
Chapter 7 bankruptcy is a four- to six-month liquidation process, by which the business — or you if you are sole proprietorship — discloses all assets, income, debt and expenses. If unexempt, business assets are sold by the Trustee and the proceeds used to satisfy or partially satisfy creditors. The business or sole proprietor is discharged of their debts. Chapter 7 bankruptcy is usually best for businesses that have no viable future. It is also sometimes called “straight bankruptcy.”
Review these pros to filing Chapter 7 bankruptcy for businesses:
Review these cons to filing Chapter 7 bankruptcy for businesses:
Chapter 11 bankruptcy is primarily a reorganization plan. Businesses filing under Chapter 11 can restructure debt as long as they can have their plan approved by the court. Chapter 11 bankruptcies are very complex and, since the debt is restructured and not discharged, you still have to pay back what you owe.
Here are some pros to filing Chapter 11 bankruptcy for businesses:
Here are some cons to filing Chapter 11 bankruptcy for businesses:
Chapter 13 bankruptcy is a three- or five-year process by which the debtor deals with debt in the Chapter 13 plan. This type of bankruptcy is sometimes referred to as “personal bankruptcy.” It usually involves the reorganization of debts for consumers rather than businesses. The debtor pays a sum monthly to the Chapter 13 Trustee, and the Trustee distributes funds to creditors in order of priority. When the plan is complete, the debtor receives a discharge of all unsecured debt. Because Chapter 13 bankruptcy is usually reserved for consumers with personal debt, Chapter 13 bankruptcy is available only to individual business owners like sole proprietors. Other types of business structures , such as corporations, LLC, or partnerships, cannot file bankruptcy under Chapter 13.
Chapter 13 is a powerful tool, with a debtor being able to reap the following pros:
There are also some cons to Chapter 13 bankruptcy, such as:
If there are only one or two debts that your business cannot pay or cannot pay in full, rather than immediately filing a bankruptcy petition you might consider negotiating with that creditor or with those creditors. Frequently the threat of bankruptcy will bring business creditors to the negotiation table in the hope that they will receive a better deal in a private setting than they would in bankruptcy. There are many options a business debtor and a creditor might explore, such as:
Any small business owner with debt trouble should contact an experienced business bankruptcy attorney to discuss all available options, including both bankruptcy and bankruptcy alternatives.