Bankruptcy for Small Business Owners

There are a few different types of bankruptcy that may be appropriate for someone with a small business, but the option that is traditionally known as "business bankruptcy" may not actually be the best choice for you.

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If you own a small business and are struggling with debt and considering declaring bankruptcy, you may wish to explore some options. There are a few different types of bankruptcy that may be appropriate for someone with a small business, but the option that is traditionally known as "business bankruptcy" may not actually be the best choice for you.

If you're running your own small business as a sole proprietor, you may want to file personal bankruptcy and include your business debts.

Small Business Bankruptcy Options

As a small business owner, the way in which your business is organized is going to make a significant difference in how bankruptcy works. If your business is organized as a sole proprietorship or as a partnership, then your business is going to be considered as one and the same legal entity with you (or with you and your partners). This means that a "business" bankruptcy could end up impacting your personal assets and your personal credit standing.

With that in mind, your options for business bankruptcy include the following:

  • Chapter 11: This is only an option for large businesses and/or businesses with significant debt and assets. It is rare for a sole proprietorship to take advantage of this chapter of bankruptcy, as usually it makes sense only for corporations that are considered separate legal "persons" from their owners. Chapter 11 bankruptcy is a reorganization type bankruptcy that allows for debts to be repaid without affecting the businesses assets or operations, so a business in chapter 11 can continue to run. It is, however, very costly and complicated to file a chapter 11 bankruptcy.
  • Chapter 13: This is one of the most common and best options for small businesses. You and your business will both be included in this type of consumer bankruptcy filing. There is no asset-sale in a chapter 13, but you do need to demonstrate that you have a sufficient income that will allow you to repay a portion of your debts. For sole proprietors or self employed individuals, this normally requires that you track your income for the six months leading up to the bankruptcy and that you have tax returns and other documentation to prove your earning capacity. With a chapter 7, the businesses and your personal debts will be included in a repayment plan all that creditors must approve. The plan could involve you repaying much of your debt solely over 3-5 years.
  • Chapter 7: This is an option for businesses and individuals that simply do not have the income to repay any portion of their debts. You will have to provide proof of income to show that you do not have sufficient assets to repay a portion of your debts. Showing this involves proving you make less than state medians or passing a means test. With a chapter 7, there is a requirement that many assets be sold to generate some money to repay to creditors. There are exemptions to what must be sold that may cover some of the "tools of the trade" necessary to operate your business, but there is a good chance that many of the assets will need to be turned over. This can make it hard for the business to continue to operate, and it may involve the liquidation of the business.

For excellent, in-depth information, see Bankruptcy for Small Businesses

Getting Help

Making the right choice for which bankruptcy option is right for you can be very difficult. You should strongly consider getting help from a lawyer to determine what options you have and what you should do based on the nature of your person and business assets and debts. Your lawyer will not only help you decide what chapter to file but will also help you with the logistics of the filing process.

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