The current economic crisis has taken its toll on individuals, as more than 1.4 million personal bankruptcies were filed in 2009. Also smarting from the high unemployment, weak consumer confidence and tight credit of the current economy are small business owners, who also filed record numbers of bankruptcies last year.
Hit by a perfect storm of local high unemployment, which stifles consumer activity, and higher operating costs derived from increased gasoline and other prices, many small businesses are struggling with escalating debts they’re unable to pay. Many small businesses took out loans in the pre-recession environment with high rates that weren’t believed to be a problem at the time because of the booming economy. Others are running up credit card and other debt to stay alive. Neither situation is sustainable in the current economic environment.
If your small business is on the verge of becoming insolvent, bankruptcy may be an appropriate means for you to discharge the business’ debts and protect your personal assets. Determining whether bankruptcy is an option for your business, and which form of bankruptcy to pursue is essential for small business owners seeking to resolve their debts and put their financial house in order.
Sole proprietorship, partnership or corporation?
Partnerships and corporations have more options in bankruptcies. Because these businesses are separate entities from their owners with their own assets and liabilities, the owners’ personal assets are usually safe in business bankruptcies. Chapter 11 and Chapter 7 bankruptcy are usually the most appropriate forms of bankruptcy for these businesses.
Chapter 7, 11 and 13
Chapter 11 bankruptcy is a reorganization of debt that business owners can use to restructure their debts in a way to make payment easier or to buy time. Chapter 11 allows businesses a variety of useful tools to help get its house in order. A business in Chapter 11 can get loans on favorable terms by agreeing to give new lenders the first crack at the business’ earnings. The business is also protected against litigation to recover debts while under Chapter 11.
Chapter 13 bankruptcy resembles Chapter 11, but is more appropriate for very small partnerships or sole proprietorship businesses. In a Chapter 13 bankruptcy, the business can continue to operate while income beyond certain amounts is applied to the business’ debts over a three to five year period. After this period, if repayment is made, the remainder of the debtors obligations are discharged.
How do you know?
- The business has incurred substantial personal debt for the owner, and there’s little chance this debt can be paid back in full.
- There’s little chance that the business can continue.
- The debt level of your business is making it nearly impossible for your business to operate or is severely impacting your personal finances.
- If your business is being sued and you or your partners’ assets are at risk because you’ve been named as parties.
Bankruptcy offers businesses a chance to wipe the slate clean and start again. Used properly, a bankruptcy can help turn a failure into a success, or help business owners move on from a disappointing loss.