Navigating Bankruptcy as a Small Business Owner: Tips and Legal Insights

Navigating Bankruptcy as a Small Business Owner: Tips and Legal Insights

If your small business is struggling financially, you may be considering bankruptcy as one of your options. Although this sounds like a dramatic step, it may be one of the best ways for your business to regain its financial footing or for you to get a fresh start as the owner. Here is what you need to know about navigating bankruptcy as a small business owner. 

Understanding Business Bankruptcy — Three Ways to File

Before you do anything, it’s important to understand your options for small business bankruptcy. You essentially have three ways to file. 

Chapter 7

When a corporation, partnership, or LLC decides to close its doors for good and file for bankruptcy, Chapter 7 is generally the type that is chosen. 

When you file for Chapter 7 bankruptcy, the court will assign a trustee to your case. That person will sell your business assets and use the proceeds to pay your creditors. All unsecured debts will be discharged, and creditors will no longer be able to pursue collections. 

Chapter 11

Chapter 11 is also known as “reorganization bankruptcy.” It’s historically been known as a costly and time-consuming option used by large businesses to restructure assets and debts and allow them to continue operations. 

Recently, however, Chapter 11 bankruptcy has become more business-friendly. Congress passed a law making it less time-consuming and expensive for businesses to use this option. 

Chapter 13

Most small businesses choose to use Chapter 13 if they want to continue operations. However, it is only available to sole proprietors. If your business is structured any other way, you will need to investigate using Chapter 7 or Chapter 11 bankruptcy. 

Which Type of Business Bankruptcy is Best for Your Business?

There’s no one-size-fits-all solution when it comes to business bankruptcy. Regulators and lawmakers have created a variety of options so business owners can find the right fit, depending on their circumstances. If you are thinking about small business bankruptcy, here are some of the questions you’ll want to consider:

  • What is your business structure?
  • Do you plan to remain in business?
  • Who is liable for your business debt?

The last question is critical because if the business owner has personally guaranteed any business debt, a business bankruptcy may not offer full protection. The creditor may still try to pursue the owner for collection, or the owner may lose personal assets to satisfy business creditors. 

Navigating the Small Business Bankruptcy Process

If you’ve decided to file for business bankruptcy, you’ll need to go through a specific process. Each type of bankruptcy will require that you complete certain forms and submit some paperwork. 

A bankruptcy petition is an official document that begins the bankruptcy process. It will include information about your debts, assets, finances, and other relevant data. 

Once you file for bankruptcy, this triggers an automatic stay, which prohibits creditors from calling you or otherwise harassing you about unpaid debts. It can also stop any foreclosure proceedings. 

Every business bankruptcy will include a 341 meeting as part of the process. This is a creditor meeting, where your creditors can ask you questions about your finances and business. 

If you file for Chapter 13 bankruptcy, you will also need to create a proposed repayment plan and attend a court hearing where it will be presented and approved. This plan details how you will repay your debts over the specified period, after which any remaining debt will be discharged. 

The business bankruptcy process can be stressful and complex if you aren’t familiar with the steps. An experienced bankruptcy attorney can protect your rights and provide valuable peace of mind. 

What Happens to Your Small Business After Bankruptcy?

That depends. If you filed for Chapter 7 bankruptcy, your business will cease operations. However, Chapter 11 or Chapter 13 bankruptcy are options you can choose if you want to continue to serve customers while you figure out your financial situation. 

It’s essential that you emerge from bankruptcy with a solid financial plan if you wish to remain in business. Without one, there’s a strong chance your business will suffer similar hardships in the future. In addition to sound legal representation, it’s a good idea to speak with a financial consultant who can guide your choices. 

Bottom Line: Business bankruptcy can be complicated, so it’s advisable to consult with a bankruptcy attorney you can trust who will help you get the financial relief you need. Gulf Coast Bankruptcy is dedicated to providing those seeking assistance with financial challenges the information they need to make the most informed decisions about their financial future.

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