Small Business Bankruptcy Basics

Small business bankruptcy offers many legal protections to those who do not have other options to meet debt obligations. Of course, avoiding bankruptcy is the best option to serve your financial future and hold on to the majority of your assets. However, some businesses will be out of options for resolving debts with creditors. Typically, if you qualify for bankruptcy, then it is a sign your financial future may be better protected through the court system.

Types of Small Business Bankruptcy

There are three basic bankruptcy options for small business: Chapters 7, 11 and 13. The first two are the most common, while Chapter 13 is rare for businesses.

  • Chapter 7 bankruptcy is a total liquidation of company assets. It is best for those companies that do not plan on continuing business in the future. Most choose Chapter 7 when they have little to no assets and rely solely on the skills of the owners or operators to generate profits. A court will determine how to liquidate remaining assets to pay off debts according to their seniority.
  • Chapter 11 is a reorganization of the business finances. In this case, the business submits a plan for how it will reorganize and pay off debts. Creditors vote on the plan, and, if an agreement is reached, the business may continue operation. This is best for businesses with immediate debt problems but promise of profits in the future.
  • Chapter 13 is usually reserved for consumers or individuals. However, it may be used instead of a Chapter 7. Here, the business files a payment plan with the court. Instead of liquidating assets, the court approves the plan and allows the owner to meet the debt obligations over time.

Bankruptcy Protections

Once a company files for bankruptcy, it enters a state of legal protection. Interest rates on outstanding debts will stop compounding, and collections agents will stop calling. All requests to collect will have to go directly to the court in charge of handling the process. This can take a tremendous burden off of the business entering the bankruptcy process. It can also end up saving the business money over time by prohibiting additional fees and penalties to be assessed during the legal process. If you qualify for bankruptcy, it is worth your while to see if this option will end up saving you both money and stress in the long run even if it is frightening.

Preserving Personal Assets

The most important goal of any business bankruptcy should be to ensure that your personal credit and asset base are not harmed when your business goes through the process. If you have used any personal assets to secure loans, they may be at risk. Entering into Chapter 7 liquidation in this case is not the best option. Attempting to submit a Chapter 13 request may protect these personal assets, like your home or car, from being seized in the business bankruptcy process. Forethought in borrowing is key; it is best to avoid risking your personal assets when you take a business loan for this exact reason.