There are risks in running a small business, and such risks also come in the form of financial setbacks. Sometimes, when debts seem to overwhelm incomes and the chances of recovery are slim, bankruptcy may serve as the answer. The most important thing small business owners could do before opting for such an action is to understand the options available to them and their effects.
Types of Bankruptcy for Small Business Owners
Depending on the business structure and purpose of bankruptcy, it can be classified into:
Chapter 7 Bankruptcy
It is commonly known as “liquidation bankruptcy” because it entails the liquidation of all business property while paying creditors. It is suitable for businesses that are not going to continue operations.
Chapter 11 Bankruptcy
Here, the business continues to operate through the reorganization process. It is used by larger companies, but small businesses may also use it when they want to implement or reorganize debt.
Chapter 13 Bankruptcy
It is mainly applied by sole proprietors. It establishes a repayment plan of three to five years while the business continues operating.
Effect on Personal Property
If your business operates as a sole proprietorship or partnership, then potentially, your personal assets might be at risk, as there is generally no legal distinction between you and the business. Corporations and LLCs generally now offer some protection; however, if personal guarantees existed on loans, that might still make you liable.
The Bankruptcy Trustee
After filing, a trustee will handle your case, scrutinizing financial documents and assets to ensure treatment among creditors when required. Their role varies depending on the bankruptcy type.
Consider Other Possible Alternatives before Filing
There are various options, even though bankruptcy is one of them. You can negotiate with creditors, consolidate your debts, or possibly refinance, which can save you from stepping into the courts. In all situations, it’s important to consult a financial adviser or lawyer to ascertain the best course of action.
Why Consulting a Professional is Important?
Filing for bankruptcy as a small business owner is a complicated process that has implications for both personal life and business. With a learned bankruptcy practitioner, you will explore options, be safeguarded, and be ushered to the best possible solution.
This post was written by a professional at Trey Wright Law, an experienced bankruptcy lawyer in Jacksonville, FL! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, specializing in bankruptcy law, estate planning, and business litigation.
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