Under what conditions should a small business file for bankruptcy?
Small businesses are essential for economic growth in Wisconsin, but some business owners may find themselves with debts that are unmanageable. While no entrepreneur launches a venture with failure in mind, being unable to pay off creditors can jeopardize the business as well as the owner’s personal assets. If the situation becomes untenable, the only way out may be to file for bankruptcy.
Small Business Bankruptcy
Bankruptcy does not necessarily mean financial ruin, and a business has options that can enable it to continue operating while reorganizing its debts, depending on the circumstances. Filing for bankruptcy also protects the business from liquidation proceedings by creditors while giving it time to reduce and delay debt payments as it regains its footing.
There are three types of bankruptcy protection, Chapter 7, Chapter 11 and Chapter 13. Each form of bankruptcy grants the business a “temporary stay” which stops all collection activities and gives the business time to put a plan in place. A sole proprietor may file under any of these forms of bankruptcy while corporations and partnerships can only file under Chapter 7 and Chapter 11.
In a Chapter 7 bankruptcy, the business is closed and the assets are liquidated to pay off the debts. If the business is a sole proprietorship, the owner must file a personal bankruptcy for both personal and business assets. On the other hand, a Chapter 11 filing allows the business to come up with a creditor-approved plan to reorganize its debts while retaining its assets and continuing to operate. Finally, a Chapter 13 bankruptcy is utilized by an individual to personally pay off business and personal debt with proceeds from future income over a 3 to 5 year period.
Reasons to File a Small Business Bankruptcy
A business owner may need to file Chapter 7 bankruptcy if credit problems cannot be resolved. This might be the best route to take when the relief of the debt burden outweighs the downside of losing the business and the long-lasting damage to the owner’s credit history. On the other hand, a Chapter 11 bankruptcy is designed for a business that is still viable, but needs to reorganize its debts in order to return to profitability. Regardless of the circumstances facing your small business, an attorney with expertise in bankruptcy law can help you explore your options.