Small Business Bankruptcy: What Owners Need to Know

Running a small business is not easy. I've been there - I have gone through the stormy waters of financial issues myself. I know firsthand the financial and operational toll it takes on you and your business.

Whether you're feeling overwhelmed by debt or struggling to keep up with cash flow, bankruptcy can seem daunting. But it can also offer a lifeline. However, with different types of bankruptcy available, it's essential to understand how each one affects your business.

Today, I want to share some insights into the main types of bankruptcy that you as a small business owner might consider: Chapter 7, Chapter 11, and Chapter 13

Bankruptcy Options for SMB's

First, it's important to know that bankruptcy isn't a quick fix; it's a serious legal process. Filing for bankruptcy can help protect your business from creditors and give you a chance to recognize, and depending on the chapter you file, it will allow you to wipe out or restructure your debts.

Choosing the right type of bankruptcy for your situation is very important. For small businesses, Chapter 7, 11, and 13 each have different processes, requirements, and outcomes, which we'll look at in detail below.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or "liquidation bankruptcy," is a tough decision. It's a last resort when a business just can't keep going and doesn't have the funds to pay off its debts. It essentially means shutting down the business.

The court will appoint a trustee to take charge of selling off the business's assets. The money from these sales goes towards paying creditors. Once everything's sold and debts are settled as much as possible, any remaining debt is wiped clean.

Here are some key things to reflect upon:

Total Liquidation: Chapter 7 means the end of the business. All assets are sold to pay off debts.

Debt Relief: Unsecured debts like credit cards and personal loans might be forgiven after the assets are sold.

Personal Assets: For sole proprietors, personal assets could be at risk, depending on the state's laws. But if you're an LLC or corporation, your personal assets might be safe.

While Chapter 7 can offer quick debt relief, it's not the right choice for everyone. If you want to keep your business running or restructure your debts instead of liquidating other bankruptcy chapters, that might be a better fit.

Chapter 11 Bankruptcy

If your small business is struggling to keep its doors open, Chapter 11 bankruptcy might be a lifeline. Often referred to as "reorganization bankruptcy," it lets you restructure your debts while continuing operations. While it's usually associated with larger corporations, small businesses can also file for Chapter 11. And there's even a simplified version called Subchapter V specifically designed for them.

When you file for Chapter 11, you'll work closely with the court and your creditors to create a reorganization plan. The plan will give you a strategy for paying back your debts over time, which might involve:

Reducing your debt

Extending payment terms

Securing new financing

Once the court approves your plan, you'll start repaying your debts according to the agreed-upon terms.

Here are some key things to know:

You can keep your business running and continue generating revenue.

Instead of liquidating your assets, you can negotiate more manageable payment terms.

Subchapter V: This option is specially designed for small businesses, making the process less complex and more affordable.

While Chapter 11 can offer a fresh start, you should remember that it's complex. Consulting experienced bankruptcy attorneys can help you go through the complexities and increase your chances of success. If you believe in the future of your business, Chapter 11 might be a valuable tool to help you overcome financial challenges and emerge stronger.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often called "wage earner's bankruptcy," is best for sole proprietors with a regular income. While it's not fit for businesses like LLCs or corporations, it's a common choice for sole proprietors to tackle business-related debts.

With Chapter 13, you create a repayment plan that stretches over three to five years. The court and your creditors sign off on this plan, letting you keep your business running while you pay off your debts according to the new schedule. Unlike Chapter 11, which is about restructuring the business itself, Chapter 13 helps sole proprietors manage personal debts tied to their business.

Here's what you need to know:

Chapter 13 lets sole proprietors create a manageable repayment plan for both business and personal debts.

While business debts are part of the plan, your personal assets are usually safe from liquidation.

Repayment happens over three to five years, easing immediate financial pressure and giving you time to reorganize your finances.

Choosing the Right Bankruptcy Chapter for Your Business

Opting for the best bankruptcy chapter for your business isn't a one-size-fits-all situation. It actually depends on things like your business structure, what you own, how much you owe, and where you see your business going in the long run.

Here's something to help you:

When Your Business is Beyond Repair: If your business is pretty much a lost cause and has valuable assets, Chapter 7 might be the most practical choice. The process involves liquidating your assets to pay off your debts.

To Keep Your Business Alive: If you believe your business can still turn things around and needs a fresh start, Chapter 11 could be the answer. It will help you to restructure your debts and continue operating.

When You're Personally Liable: If your personal finances are closely tied to your business, especially if you're a sole proprietor, Chapter 13 might be a good fit. It lets you protect your assets and pay off your debts over some time.

Finding the Best Bankruptcy Lawyer: I always tell people to consult a bankruptcy attorney to check their options and get a better understanding of each decision.

Here are some of the best bankruptcy attorneys I can personally recommend:

Kevin S. Neiman: Denver, Colorado

Abrams Fensterman LLP: New York

King&King Law, LLC: Atlanta, Georgia

Gregory K. Stern, P.C.: Chicago, Illinois

Remember that filing for bankruptcy is a challenging decision, but it can also be a chance for a fresh start.