Small Business Bankruptcy Options

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No one starts a business with an eye to failure. Unfortunately, the sad truth is that as many as eight out of ten new businesses fail within the first 18 months, depending on the industry. This failure could be due to a variety of factors from lack of experience and knowledge on the part of the entrepreneurs to serous fluctuations in the market. Regardless of why it happens, if you find yourself in a situation where you can no longer afford to run your business, you might have to face the music and file bankruptcy.

Bankruptcy: Not a Dirty Word

On the surface, bankruptcy could be seen as a sign of failure – an indictment of your business skills. Look a little deeper and you might realize that it’s also an opportunity to learn from your mistakes and either clean the slate, or restructure your company. There are plenty of large, famous corporations and entrepreneurs that have filed bankruptcy, some of them multiple times, and many of them have since come back stronger than before.

Types of Bankruptcy

There are four types, or chapters, of bankruptcy that could apply to your business, depending on how it is structured.

·  Chapters 7 and 13 are usually reserved for individuals, but both could be used in a small business context if you are a sole proprietor and your business and personal assets are combined.

·  Chapter 11 is usually reserved for all companies, including sole proprietors, generally where your business and personal assets are not combined.

·  Chapter 12 is reserved for “family farmers or family fishermen with regular annual income.”

Each type of bankruptcy works as follows:

·  Chapter 7, also referred to as liquidation, is what most people think of when they hear the word bankruptcy. Under this chapter, all of your debts are liquidated and you start over with a clean slate. If you have any assets tied to the liquidated debt, such as a car lease or a mortgage, you also have to relinquish the assets. However, there are some assets that you might be able to keep.

·  Chapter 13, also referred to as debt restructuring, is a debt repayment agreement that you and your creditors make with the courts. Under this chapter, you could reduce the total amount of your debt, and end up paying back much less than you owe. If you have assets tied to the debt, you should be able to keep them so long as you uphold the agreement.

·  Chapters 11 and 12 are similar to Chapter 13 in that they also involve restructuring and repaying the debt. The difference is that Chapter 11 is reserved for corporations and Chapter 12 is reserved for family farms and fisheries.

Finding a Lawyer and Which Chapter to Choose

The chapter you choose depends in large part on your situation. Michael Doan, who is a partner and a bankruptcy attorney at Doan Law, says that Chapter 11 is primarily for wealthy individuals with multiple businesses and assets, so if you do not fall into that category, a Chapter 11 might not be the best choice. Ultimately, your attorney can help you determine which course of action is best for you. Here are some things to consider when you discussing your bankruptcy options with your lawyer:

·  Is the business a separate entity, like an LLC, with finances separate from your personal finances?;

·  Do you have the financial means to pay back at least some of the debt over a period of years?

·  Do you have the personnel resources reorganize or restructure the business?

·  Are there any assets that you want or need to keep;

If you are unsure that you want to pursue bankruptcy, you could also look into credit repair services like SCORE or Corporate Turnaround that might be able to get your company back on track. However, you should be aware that these organizations might not be able to help you if you already have any liens or judgments against you, and they might not be able to reduce the amount you owe the way a bankruptcy could.

If you are uncertain of your financial picture, or if your creditors have already taken legal action, enlisting the help of a bankruptcy attorney could be your best option.

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