Bankruptcy and Your Business: Options and Strategies

Being a business owner can be a very fulfilling experience. Most business owners have poured hours—if not a lifetime—of hard work, dedication, creativity, and perseverance into their businesses. And so one of the most heartbreaking realizations may be that a business isn’t solvent. Unfortunately, this is a reality that many business owners throughout the United States have come face to face with, particularly in the wake of the pandemic. If your business is drowning in debt and you’re feeling overwhelmed and unsure of your options, it’s important to know that bankruptcy may be a solution to saving your business and getting a clean financial slate. To learn more about options and strategies when it comes to bankruptcy and your business, it’s best to speak to a legal or financial professional (or both!). In the meantime, here are some things to know about bankruptcy and your business—

When Should a Small Business File for Bankruptcy?

Before even thinking about the specifics of your financials when you’re in debt, one of the first questions to ask yourself to help determine whether or not bankruptcy is for you is, “Do I still want to keep this going?” If your heart isn’t in it and you’re ready to move on from the business, then it may be time to wind down operations—working with a lawyer can help. If you do want to keep the business going, then here are some other things that you should be thinking about in considering bankruptcy:

• Have you considered other options? While bankruptcy can be a positive decision for your business, it’s also a very consequential one. This is why before you decide to file for bankruptcy, you should consider all of your options. Other options for your business might include:
• Debt negotiation. In some cases, you may be able to work with creditors to negotiate your debt repayment. Creditors want to get paid; if there is any chance of you not repaying your debt, they will do what they can to ensure that they get repaid—even if it’s only a fraction of what they were originally owed. An attorney can lead the negotiation process. 
• Debt consolidation. Another option for managing your debt is to consolidate your debt. Debt consolidation is the process of merging all of your debt together into one single bill. This can help you to manage interest rates and payments, and may make repaying your debt more feasible. 
• Refinancing. If you have loans that you’re defaulting on, working directly with the bank to refinance your loan, including a mortgage loan if applicable, is strongly recommended. A bank may be able to adjust your interest rates or loan repayment terms in order to make your monthly payments more affordable. 
• Are you eligible for bankruptcy? Once you’ve weighed all of the options, another important consideration is whether or not your business is even eligible for bankruptcy. While there are no debt or income requirements or limitations for filing for bankruptcy under Chapter 11, there are such requirements and limitations for filing for other bankruptcy types. Review your options with a professional so you’re clear on what you can and cannot do. 
• Do you understand the benefits and consequences of bankruptcy? Finally, before you decide to file for bankruptcy, it’s important that you understand all of the benefits and consequences of filing. Bankruptcy can help you to get out of debt, but it will also make it very hard to borrow money for years into the future. 

Bankruptcy Options for Small Businesses 

For small business owners, there are three typical options for filing for bankruptcy; however, which type of bankruptcy you can file for will depend on your business structure, debt level, and income amount. 

• Chapter 7 bankruptcy. Chapter 7 bankruptcy is for a sole proprietor who meets the means test, which means that they don’t have the income and assets to repay their debts. This type of bankruptcy will erase business and personal debts. 
• Chapter 13 bankruptcy. A Chapter 13 bankruptcy is similar to a Chapter 7 bankruptcy, except that there is no means test and, because the debtor has a sufficient level of income and assets, they will enter into a repayment plan. This type of bankruptcy is not available for partnership. LLCs, or corporations. 
• Chapter 11 bankruptcy. Finally, a Chapter 11 bankruptcy is the third option for small business owners and large business owners. This type of bankruptcy can be filed by LLCs, corporations, partnerships, and sole proprietors, although it is rare for sole proprietors to choose this option. In this type of bankruptcy, the debtor’s debts are reorganized, similar to how they are reorganized in a Chapter 13 bankruptcy. 

Learn More Today

If filing for bankruptcy is something you’re thinking about, working with a professional who has experience representing businesses like yours is strongly recommended. Learn as much as you can and seek representation before taking any actions.