How to File Bankruptcy as a Small Business Owner

Many American business owners are being hit pretty hard by the recent economic pressures created by high unemployment rates and the drop in the housing market. As a result, more and more small business owners are forced to get legal protection from the bankruptcy court, either to liquidate a business or reorganize assets and debts to continue operating.

Bankruptcy Options for Business Owners

Because there are many various types of business structures, there are several options available by bankruptcy law to help a struggling business. For corporations, limited liabilities and other structures where the business is a separate entity from the owner, the process is very complex, and beyond the introductory scope of this articles.

However, for sole proprietorship, such as small construction, painting, plumbing and other small service oriented businesses, the owner is often tied personally to the business debt, and as a result must file for personal bankruptcy.

Liquidation or Reorganization?

Depending on the particular financial circumstances of the business, assets required to run it, and how “tied” it is to the skills of the owner, it may be advantageous to liquidate the business assets and start over.

Chapter 7

In a chapter 7 liquidation, the assets of the company are sold off to repay creditors in part, and then the business owner is relieved of all liability to repay debt. In businesses that are not capital intensive, and are based primarily on the skill of the business owner, a chapter 7 liquidation may be the best and fastest way to restart the business with a clean slate.

Chapter 13 or 11 Reorganization

Some small businesses require a lot of equipment, property and other capital in order to operate. In this case, it may be preferable to reorganize the debts through a chapter 13 or chapter 11 bankruptcy. This allows business owners to get out of leases, get legal protection from creditor collection attempts, and modify loans and other debts to allow the business to run.

The downside is that the business owner will have to invest a lot of time and money for legal fees, and the process may take many years to complete. During those years, payment plans are made and the business owner must continually report finances to the bankruptcy trustee and the court.

Talk to a Bankruptcy Attorney about Business Bankruptcy

Filing bankruptcy as a business is much more complicated than typical personal bankruptcy cases, and many times, the court requires an attorney represent the business owner.

It is important to get legal advice before making any decisions regarding bankruptcy as a business owner.