Navigating Small Business Bankruptcy Options

Is your small business struggling with debt, or are you curious about the types of bankruptcy that might affect it? Either way, hearing the word “bankruptcy” can be stressful and raise concerns about the future. It’s essential to understand the different kinds of small business bankruptcies and their impact.

Hi, I’m AJ! After selling my company for multiple seven figures, I created Small Business Bonfire to help both aspiring and established entrepreneurs make informed decisions to protect their business interests.

Let’s explore the types of small business bankruptcies and how they can affect your business.

Key Points:
Bankruptcy is a legal process small businesses can undergo when they can’t pay their debts. This process usually begins with the business or its creditors filing a petition with the bankruptcy court. It’s a significant step but can provide a way out for businesses overwhelmed with debt.

There are several types of bankruptcies to consider:
– Chapter 7: Often called “liquidation bankruptcy,” this type is the most common. It usually takes four to six months and often results in the business closing. A trustee sells the company’s assets to repay its debts, and any remaining debt is discharged. However, this type does not erase the bankruptcy from your credit report, which can stay for up to ten years.
– Chapter 11: Known as “reorganization bankruptcy,” this is typically used by larger corporations and LLCs. It allows the business to propose a plan to stay operational while repaying its debt over time. This process is complex and costly but allows the company to restructure and emerge profitably.
– Chapter 13: Suitable for businesses with a reliable income, this type involves a repayment plan lasting three to five years. It’s only available for businesses run as sole proprietorships and allows businesses to keep operating while paying off their debt.

There are also specialized bankruptcies like:
– Chapter 12: Designed for family farms and fisheries, allowing them to reorganize while retaining ownership.
– Chapter 15: Created for cases involving more than one country, promoting cooperation between U.S. courts and foreign debtors.
– Chapter 9: For financially distressed municipalities, offering protections and resolutions for their outstanding debts.

Choosing the right type of bankruptcy depends on your business structure, earnings, and other individual factors. Consulting a bankruptcy attorney is crucial to navigate these options and determine the best course of action.

Understanding these different types of bankruptcy and their processes can help you make the best decision for your business’s future.