Business Bankruptcy – Should You or Shouldn’t You?

In today’s economic climate many small businesses are being faced with the daunting choice of trying to sustain their business thru the adversity, closing up shop, or filing for bankruptcy in an effort to save their company.  While for most, just the thought of the word ‘bankruptcy’ sends their heart into overdrive and causes them to break out in a sweat, there are circumstances where choosing bankruptcy may not only be your last choice – but also your best choice – to save the company you’ve worked so hard to build.  Instead of looking at it as something shameful, you can look at it as the right move to give your firm its best possible chance for full recovery and future productivity and profit.

In order to help facilitate your evaluation of your particular situation and aid you in making a decision that is best for your business, we thought it would be helpful to provide some basic information and some examples for your review.


Types of Bankruptcies

There are four types of bankruptcies available to businesses in financial trouble:

Chapter 7

The purpose of Chapter 7 bankruptcy is to immediately liquidate the business debtor’s assets. When a debtor files for Chapter 7, a trustee is appointed to take charge of the business. At that time, the trustee begins the process of liquidating all assets. Once the trustee has recovered and liquidated all assets, then the creditors are able to file claims with the court requesting payment. The assets are then divided among the creditors, allowing also for trustee fees and costs.

Chapter 7 is for businesses that see no viable financial future in their business and are too far in debt to find a way out. At that point, there is no need for a restructuring plan, but just a way to get out of the business with minimal personal damage.

Chapter 11

Chapter 11 bankruptcies are designed to allow a struggling business time to restructure or reorganize in order to revive the business. When a business files for Chapter 11 bankruptcy, it is typically allowed to continue operating — under the supervision of the bankruptcy court and without interference from creditors. The debtor will need to negotiate a reorganization plan with creditors, which usually provides them partial payment. Creditors or other parties can file a competing plan if they feel the proposed plan is not in their best interest.

A Chapter 11 filing is best for a business that is behind in debt payments, but which still has some amount of assets and regular income.

Chapter 13

While businesses cannot technically file for Chapter 13 bankruptcy, an individual can file for themselves and cover all expenses they may personally owe due to a failed business venture. In some cases, sole proprietorships such as private practices are covered.

In a Chapter 13 filing, the court and creditors must approve a repayment plan that allows creditors to collect debt while protecting the property of the debtor. In order to file, a person must be able to show regular income as a means for meeting some of the debt load over a 3- to 5-year period. At the end of the period, and in the terms agreed upon by the court, additional unpaid debt will be discharged. (Exceptions apply for alimony, child support, school loans, and mortgages.)

Chapter 13 is a viable option only for those individuals who, due to a failed business, are overloaded with debt or have personal assets at risk.

Chapter 12

Chapter 12 bankruptcy closely mirrors Chapter 13, except that it applies specifically to family farms. It is designed to allow the family to stay in the business of farming while reorganizing and paying off prior debts. It is preferable for farms over other bankruptcy options because it takes into account the unpredictability and seasonal nature of agriculture.


Stories from Those Who Have Been There

How One Small Business Survived a Chapter 11 Filing

Life After Bankruptcy

Shame in Filing Bankruptcy?  Or Opportunity for Recovery?

Well-known Historical Figures Who Have Filed Bankruptcy


Nationally Known Persons/Firms Bankruptcies (and recoveries)

Tommy Hilfiger (at age 24)

Henry Ford

Kim Basinger

Continental Airlines

R.H. Macy



Where to Find a Bankruptcy Attorney

  • Take advantage of free consultations offered by many bankruptcy attorneys.
  • Contact your county bar association’s referral panel.
  • Another resource for locating a bankruptcy attorney is the National Association of Consumer Bankruptcy Attorneys.  This site includes an attorney finder, although the organization doesn’t certify the attorneys’ skill-level or expertise.


Strategies for Surviving Bankruptcy

Knowing When Bankruptcy is Best and How to Survive It

Secrets of Surviving Bankruptcy

Surviving Franchisor Bankruptcy

Surviving Another’s Bankruptcy

Surviving Business Bankruptcy

Surviving Your Company’s Bankruptcy

In closing, while we certainly encourage you to explore every possible option to get your company back on stable ground, we hope that the information provided in this article will help you to recognize that if bankruptcy is the only option left you should view it as a chance to re-build rather than business failure.


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