Filing for bankruptcy can be a daunting prospect for any small business owner, but it can also provide a path to recovery. When you know what you’re getting into, you can make smarter decisions about what path to choose.
Here’s your guide to navigating bankruptcy as a small business owner, including an overview of the different types of bankruptcy filings, how to approach the process, and what to expect moving forward.
Understanding the Different Types of Bankruptcy
The first step in navigating bankruptcy is knowing which type of bankruptcy filing is best suited for your situation. The three most common bankruptcy chapters for small businesses are Chapter 7, Chapter 11, and Chapter 13. Each has its own set of rules, benefits, and drawbacks.
Chapter 7 (Liquidation Bankruptcy)
If your business is struggling with more debt than it can repay and doesn’t have a viable path to recovery, Chapter 7 may be the best option. In Chapter 7, your business assets are liquidated to pay off creditors. This type of bankruptcy usually leads to the closure of the business, but it can help you wipe out most, if not all, of your debts. Chapter 7 is typically used when the business has no hope of future profitability or when the owner wishes to walk away from the business entirely.
Chapter 11 (Reorganization Bankruptcy)
Chapter 11 is often used by larger companies, but it can be an option for small businesses as well. In this type of bankruptcy, the business continues to operate while reorganizing its debts. The goal is to restructure debt in a way that makes it manageable, allowing the business to stay afloat and eventually emerge from bankruptcy as a healthier entity. Chapter 11 is a complex and expensive process, so it’s usually only worth considering if your business has a realistic chance of recovery.
Chapter 13 (Debt Repayment Plan)
Chapter 13 is more commonly used by individuals but can sometimes apply to small businesses structured as sole proprietorships. Under Chapter 13, you can create a repayment plan that lasts three to five years. This plan allows you to keep your business running while paying off your debts over time. It’s a good option if your business has steady income and just needs some breathing room to manage its financial obligations.
Assessing Whether Bankruptcy Is the Right Choice
Filing for bankruptcy is not a decision to be taken lightly, and it’s important to assess whether it’s the right move for your business. Ask yourself these questions:
- Can I realistically repay my debts? If you’re barely keeping up with minimum payments or falling further behind each month, it might be time to consider bankruptcy.
- Is my business still profitable? If your business still has potential for profitability but needs time to restructure, Chapter 11 or Chapter 13 might be suitable options. But if the business is no longer viable, Chapter 7 could be the best path forward.
- Have I explored all other options? Before filing for bankruptcy, consider other alternatives, such as negotiating with creditors, seeking additional financing, or selling non-essential assets to raise cash.
A bankruptcy attorney can help you assess your options and determine whether bankruptcy is the best solution.
Steps to Filing for Bankruptcy
Once you’ve decided that bankruptcy is the right choice for your small business, it’s time to start the filing process. Here are the essential steps involved:
1. Gather Accurate Financial Documentation
The foundation of any bankruptcy case is accurate financial records. You’ll need to gather all relevant documents, including balance sheets, profit-and-loss statements, tax returns, and lists of assets and liabilities. Having up-to-date, thorough records will make the process smoother and help you avoid delays or complications.
2. Consult with a Bankruptcy Attorney
Navigating bankruptcy on your own is risky and complicated. Hiring an experienced bankruptcy attorney is crucial for ensuring you file correctly and make strategic decisions throughout the process. Your attorney will help you choose the right type of bankruptcy and guide you through the legal steps.
3. File Your Bankruptcy Petition
Once you and your attorney have prepared your case, you’ll file a bankruptcy petition with the court. This petition includes all of your financial information, a list of creditors, and any other relevant details. Filing the petition triggers an automatic stay, which temporarily halts collection efforts, such as lawsuits or repossessions, giving you breathing room to work through the process.
After filing, you’ll attend several hearings or meetings with creditors, depending on the type of bankruptcy you choose. In Chapter 7 cases, for example, a trustee will oversee the liquidation of your assets. In Chapter 11 or 13 cases, you’ll work with creditors to create a plan to repay or restructure your debts.
Once the court approves your bankruptcy plan, it’s essential to stick to the terms, whether that involves making payments or liquidating assets. Failing to meet the requirements can result in your bankruptcy case being dismissed, which means your debts won’t be discharged, and creditors can resume collection efforts.
The Potential Impact of Bankruptcy
Bankruptcy will have a significant impact on your credit, and it’s important to understand that it will stay on your credit report for several years (typically seven to ten years, depending on the type of bankruptcy). This can make it harder to get loans or financing for future business ventures.
However, bankruptcy also provides relief from overwhelming debt, allowing you to rebuild your financial future. Many small business owners who file for bankruptcy are able to recover, restart, and even rebuild their businesses over time. By starting the process sooner rather than later, you can give yourself the best chance of reaching a full financial recovery!