Are you considering filing for bankruptcy for your small business? If so, you’re probably wondering about the process. If your small business is in trouble, you need to determine whether filing for bankruptcy is the best choice for your company’s financial situation.

Pre-Bankruptcy Planning

One important factor in deciding whether or not bankruptcy is the right option for your business hinges on what type of entity your business is run as. Corporationsand LLCs are legal entities that are separate from their managers and shareholders. These types of small businesses can file Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy. If your small business is a sole proprietorship, it is tied to the owner and cannot legally be classified as a business entity. If you are running a sole proprietorship, you can file for personal bankruptcy, but not corporate bankruptcy.

Business Bankruptcy: Chapter 7 or Chapter 11?

The next step is determining whether your small business should file for Chapter 7 or Chapter 11 bankruptcy. Chapter 7 bankruptcy will liquidate most assets & debt – whereas Chapter 11 will allow your business to liquidate some debt, while creating a repayment plan for the remaining debt. A Chapter 7 bankruptcy may be a good solution if the business has no future, with no substantial assets, and the debts are so overwhelming that restructuring is not possible. Unlike an individual who file Chapter 7, corporations don’t get their debt discharged when the bankruptcy process is completed. However, a Chapter 7 small business bankruptcy does allow a business to have a trustee handle asset liquidation, usually providing a greater return to creditors with less headache and lower legal fees for the business. The alternative to filing a Chapter 7 business bankruptcy is to use state collection procedures to satisfy creditors and wind the business down. This process usually involves a wide variety of lawsuits and legal complications and can stretch over several years, versus the quick and consolidation nature of a bankruptcy filing.

Chapter 11 Business Bankruptcy Reorganization

Small businesses filing for Chapter 11 bankruptcy will have the chance to propose a plan of reorganization, including a repayment plan for eliminating debt and legal liabilities. Chapter 11 bankruptcy for small businesses requires a good deal of time on the part of managers and owners and competent counsel. Business managers and owners will be required to comply with bankruptcy requirements, meet with legal counsel and the trustee, and negotiate with creditors. Chapter 11 business bankruptcy is typically more expensive than Chapter 7 because it is more complex and requires a greater time commitment. If you think your business might be heading towards bankruptcy or some type of winding down, speaking with an attorney as early in the process as possible is imperative. Counsel can advise you whether bankruptcy is the best option or alternative approaches, such as a receivership or new investor, might be a better fit.