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Small Businesses and Bankruptcy: Options for Owners

Should I file Bankruptcy for my small business?

Credit-Repair20157It is common for businesses apply for credit when starting out.  It is also common for successful businesses to acquire more debt to expand.  Unfortunately, it is also common for businesses to take a turn for the worse.  In today’s economy, a business could be thriving one year and find itself on the brink of dissolution the next.

Business Debts

If your business has debts, dissolution doesn’t have to be the only option.  Bankruptcy can help a business reorganize its debts, provide protection from creditors while the business liquidates unwanted assets, or wipe out an owners personal liability to alleviate some of the risks of owning a business.

In most cases, if a business takes out a line of credit or incurs debt, the business owner will be asked to sign as a personal guarantor of the debt.  Therefore, there are two parts to solving the debt problem.  First, a business owner must determine what to do with the debt on the business side.  Second, the owner must deal with the debt personally.

Debt Relief Options

Handle the Debt Outside of Bankruptcy

Of course businesses can always deal with the debt outside of bankruptcy if possible.  Businesses do this all the time.  They negotiate or settle the debt with their creditors.  Or they liquidate some of their assets to pay off the debt.  Or they simply continue operating in hopes that the business profits can pay of the debt.

However, during this time, creditors can file lawsuits against the business.  To protect against lawsuits, the business and its owners can file for bankruptcy.  There are three main bankruptcy options for businesses and their owners, Chapters 7, 13 and 11.

Chapter 7 Bankruptcy | Liquidating and closing down business

Chapter 7 Bankruptcy is used by businesses that can no longer survive.  This is used for businesses that cannot turn a profit, with our without the debt.  Some businesses simply don’t make it.  In this situation, if the business has assets, then they can file Chapter 7.

Chapter 7 is used to liquidate and shut down the business.  During the Chapter 7, the bankruptcy trustee will sell the businesses assets and distribute it to the creditors.  In this situation, business owners also file a Chapter 7 bankruptcy to wipe out any debt they may have personally guaranteed.

In cases where the business is a sole proprietorship, then the business does not have to file bankruptcy.  The owner can file bankruptcy, wipe out the debt and continue operating the business.

Chapter 13 Bankruptcy | For Sole Proprietorships that continue to operate

Businesses cannot file Chapter 13 bankruptcy.  However business owners can file Chapter 13 to relieve the debt that they personally guaranteed.  For a sole proprietor, the business owner can file Chapter 13, continue operating the business and discharge the debt upon completion of the Chapter 13 plan.  In this scenario, the business would not owe the debt because it was a sole proprietorship.

Chapter 11 | Reorganize the debt for businesses that continue to operate

Chapter 11 helps businesses renegotiate, restructure and reorganize.  Businesses file Chapter 11 because they wish to continue to operate.  Chapter 11 uses all aspects of the different bankruptcy Chapters.  It may involve liquidation as well as restructuring debt.  It can involve third parties as well that might want to help the business.  The goal of a Chapter 11 is to find ways for the business to pay off its debts while becoming profitable.