What Is a Business Bankruptcy and How Does It Work for Small Businesses

Most people associate business bankruptcy with Chapter 11 plans. Chapter 11 bankruptcy is sometimes known as reorganization. A plan for addressing debts is drawn up, the plan is voted on by creditors and the court approves the plan if it feels it is appropriate. While Chapter 11 is often a good selection for large businesses, it is seldom a good option for small businesses because Chapter 11 plans are very expensive to administer.

A Chapter 11 bankruptcy also assumes that an entity wants to continue. Sometimes a small business owner would rather start over. For most people, using Chapter 7 for asmall business bankruptcy is often a good solution.

Many people create small businesses because they have a particular skill they are using to run the business. Oftentimes, these businesses don't have much in the way of assets. The business is operating because of an individual's skills. If the market is not sustaining the business, it may be time to close the doors.

Benefits of Chapter 7 for Small Business Bankruptcy

One of the primary advantages of using Chapter 7 bankruptcy for a business bankruptcy is the opportunity to take care of personal liabilities as well as business liabilities. Although many people structure their businesses as limited liability companies or corporations to shield themselves from liability, they often find themselves having to sign a personal guarantee to back any loans they take out for their businesses. Such personal pledges make them personally vulnerable.

Using Chapter 7 to file business bankruptcy not only eliminates the personal guarantees made on business debt and personal debt created for the business, but it also eliminates most other personal debt as well, helping an individual get a truly fresh start.

Considerations When Filing Bankruptcy

A successful Chapter 7 small business bankruptcy depends on adequate planning and preparation before filing. There may be several steps that must be critically timed to get relief. A few critical issues may be:

  • Liquidation of inventory
  • Timing to minimize tax liability
  • Documenting assets and liabilities to satisfaction of trustee

Once a bankruptcy has been filed, the trustee will be responsible for gathering the non-exempt assets, selling them and using the proceeds to pay various creditors involved. For businesses in particular, there may be some debts that will want to be addressed before the bankruptcy has even been filed.

Although personal income taxes are sometimes dischargeable in bankruptcy, business taxes are not. Business sales and employee payroll taxes are not dischargeable and even though the business may no longer exist, the liability for paying these taxes may still attach to the responsible person associated with it. An experienced bankruptcy attorney may be able to help you address these debts before your case has been filed.

With business bankruptcies, the trustee may want to see business documents that not only reveal the business' structure, but document the remaining business assets as well as liabilities. Your attorney can give you guidance to help you detail these in a way that will be satisfactory to the bankruptcy trustee.

Bankruptcy is a complex process, especially if you are a small business owner. If you are looking for a fresh start, you should speak with a bankruptcy attorney with extensive experience handling small businesses bankruptcies.