Can I keep operating my business if I file for bankruptcy?

Becoming an entrepreneur and owning a small business entails a certain amount of risk. It is not uncommon for small business owners to suffer financial setbacks, even to the point where they consider filing bankruptcy to solve their financial problems. Many business owners hesitate to seek bankruptcy protection because they are unsure how filing bankruptcy will impact how they operate their businesses. Small business owners should be aware of some of the ways that filing bankruptcy can affect their businesses.

Chapter 7 bankruptcy for small businesses

Struggling business owners may choose to file Chapter 7 bankruptcy, also called liquidation bankruptcy. In Chapter 7 cases, the trustee handling the case liquidates all of the filer's non-exempt assets to pay back the filer's creditors. In many cases, business owners who file Chapter 7 bankruptcy will not be able to continue to operate their businesses, as the trustee will likely sell off any assets the business has to repay creditors.

If people run their businesses as separate entities, such as LLCs or corporations, and choose to file Chapter 7 bankruptcy they must do so on the part of their business entities. Business owners may also want to consider filing Chapter 7 personally, as they often would have had to personally guarantee lines of credit extended to the business entity. Personally guaranteeing those debts means that creditors can go after the business owners for debts if the business fails.

Chapter 11 bankruptcy

Another option for struggling business owners is Chapter 11 bankruptcy. Chapter 11 bankruptcy is a means for business owners to reorganize their debts and set up a repayment plan while continuing to operate their businesses. A trustee may be appointed to oversee the business operations, or owners can continue to run businesses as debtors-in-possession.

However, not all businesses can survive through Chapter 11. Some structures may survive such as sole proprietorships or LLCs with few assets and little debt. The more debts that a business carries, the less likely a trustee would be to want to take any assets the business has because it would decrease the likelihood that the business would ultimately turn its finances around. However, a business with overwhelming debt may not be a sensible entity to continue to run.

Seek legal counsel

Filing for bankruptcy is a big step, and it is not a decision that a small business owner should make without the assistance of an experienced business bankruptcy attorney. If you are a small business owner considering bankruptcy, meeting with a skilled bankruptcy attorney can give you a complete picture of how filing bankruptcy will impact your business operations, as well as other debt relief options that may be open to you.