Filing Bankruptcy May Help Some Small Business Owners

At some point, filing for bankruptcy protection may be the best, or only, available option to close or try to save a small business in a struggling economy. While filing a Chapter 7 liquidation bankruptcy may terminate a small business, a Chapter 11 reorganization bankruptcy can help a business to successfully reemerge and begin anew. Taking the first steps to move forward with a bankruptcy may be painful for small business owners, but there are some strategic advantages and benefits to filing, especially doing so sooner rather than later.

Reasons for Filing

All small businesses are unique, so the reasons for filing bankruptcy vary greatly among small business owners. According to one study published by the Small Business Advancement National Center, some major reasons that small businesses have pursued bankruptcy were due to:

  • External or internal conditions (i.e. increased competition or management mistakes)
  • Financing or tax problems (i.e. high debt or tax fraud)
  • Creditor disputes (i.e. creditor or contract lawsuits)
  • Personal issues (i.e. major illness of owner)
  • Calamities (i.e. natural disasters or accidents)

Despite the reason for the financial hardship, there are two ways small business owners can approach bankruptcy.

Business Bankruptcy Options

Small business owners may seek Chapter 7 bankruptcy protection. This option puts an automatic stop to all creditor collection activities until an assigned bankruptcy trustee can liquidate company assets to pay outstanding debts. Most small business owners, however, choose to file Chapter 11 bankruptcy. This option allows the small business to continue its day-to-day operations while the owner reorganizes both secured and unsecured company debts, and then proposes a repayment plan to the bankruptcy court for approval and execution.

Key Advantages

After small business owners decide to file for bankruptcy protection, many find renewed confidence in themselves and their businesses. These feelings are likely motivated by the opportunity bankruptcy provides to minimize creditor interactions, lower or settle unsecured debts, prevent further legal actions and possibly return to profitability. Owners can also overhaul their business model, set higher standards for operating, and employ new business strategies for company growth, which may help to attract new and better investors.

Opportunities Abound

More than 323,000 businesses filed for bankruptcy from 2004 to 2010, according to the American Bankruptcy Institute. A Small Business Administration study indicated that about 70 percent of business owners who filed for bankruptcy were able to either reorganize or liquidate their businesses successfully. After surviving a bankruptcy, owners are less likely to repeat bad credit practices and are ready to embark on new business adventures.

If you are a small business owner in the midst of considering when and how to file for bankruptcy protection, contact a local bankruptcy attorney to discuss your unique business situation and which filing option, whether Chapter 7 or 11, would be best for you.