Bankruptcy for Small Business Owners

Bankruptcy can be as scary as it sounds. With stories of how “seemingly” stable companies go from bedrock to bankrupt all over media, it’s easy to assume that it is the worst possible situation to find yourself in. However, this is not always the case. When your small business is overburdened with debt, you might be forced into bankruptcy. In this scenario, you will have three options to file for; Chapter 7, Chapter 11, or Chapter 13 bankruptcy. And before deciding the type of bankruptcy you want to file, you’ll need to decide whether you need to file a business or personal bankruptcy.

If you are responsible for your company’s debts, you will need to file personal bankruptcy. Liability, in this case, means you are a sole proprietor or in a general partnership. As a small business owner, filing for Chapter 7 or 13 bankruptcy may be the right choice for you though you may still choose Chapter 11 too. On the other hand, if you are running an LLC or corporation, then the business will be liable for offsetting the debts ( with some exceptions). Should you want to file for bankruptcy, you’ll need to do it on behalf of the business, under Chapter 7 and 11.

How do you tell if your business is in a financial danger zone where you need to file for bankruptcy? Here are some questions to ask as you consider this question.

  • Are bill collectors contacting you?
  • Are you uncertain of the amount of money you owe?
  • Are you thinking about consolidating debt?
  • Are you using credit cards to pay for essentials?
  • Do you feel out of control or scared when you think about sorting your finances?
  • Are you only making minimum payments on your credit cards?

You might want to assess your financial state carefully if you answered yes to some or all of these questions. Because at its most basic, bankruptcy is a situation where you owe more than you are capable of paying. Declaring bankruptcy may help you get out of a financial mess that you are in, but it should be approached with care.

Declaring bankruptcy

There are two ways to approach this – you can either do so voluntarily or let the lenders ask the court to declare you bankrupt.

Types of bankruptcy

Chapter 7

This bankruptcy liquidates your business assets immediately. When you file for Chapter 7, a trustee will be appointed to oversee your business. He or she initiates the process of liquidating the assets. You file Chapter 7 when there isn’t a viable financial future for your business and are too deep in debt to redeem yourself.

Chapter 11

This bankruptcy is meant to give struggling companies time to reorganize and restructure to recover. When you file a Chapter 11 bankruptcy, you will continue with operations but under the watch of the bankruptcy court. Chapter 11 bankruptcy is ideal for companies that are behind payment schedules but still have regular income and some amount of assets.

Chapter 13

Chapter 13 bankruptcy can only be filed by an individual, as opposed to businesses. However, if you are a sole proprietor, you can file it for yourself, to take care of all expenses you owe as a result of a failed business venture. To file this bankruptcy, you must show regular income to help offset your debt over a three-five year period.

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Tags: Bankruptcy , small business
Mashum Mollah

Mashum Mollah is a digital marketing analyst, SEO consultant and enthusiastic internet marketing blogger. He is very much passionate about social media and he is the founder Social Media Magazine.

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