Many business owners face tough financial decisions. While the word “bankruptcy” might sound scary, it actually serves as a legal tool that can either help restructure your business debts or provide an organized way to close operations. Knowing what bankruptcy options are available can help you make informed decisions about your business’s future.
Reorganization (Chapter 11)
Chapter 11 offers breathing room from mounting debts while keeping your business open. When you file for this type of bankruptcy, you stay in charge of your company while restructuring your debts under court protection. You might consider this option if:
- Your business shows promise but needs time to bounce back.
- Your company creates more value by staying open.
- Creditors are pressing hard, but you see a path to recovery.
To qualify for a Chapter 11 bankruptcy, you must prove your business can generate enough profit to pay debts. This means creating a solid business plan and maintaining careful financial records.
Liquidation (Chapter 7)
In some cases, the wisest move is knowing when to close. Chapter 7 helps you do this properly. During this process, a court trustee steps in to sell business assets and pay creditors in an orderly way. An “automatic stay” takes effect, which temporarily stops most collection actions. Consider filing a Chapter 7 bankruptcy if:
- The business struggles to make a profit despite your best efforts.
- Operating costs consistently exceed revenue.
- A clean break would work better than trying to recover.
Keep in mind that personal guarantees on business loans don’t disappear. You must work openly with the trustee and share all financial information, including recent business transactions.
Individuals and sole proprietorships (Chapter 13)
If you are running your business as a sole proprietor, Chapter 13 might work best for you. This option lets you keep your business running while managing debt through a structured payment plan. Think about Chapter 13 if:
- Your business provides a steady income.
- Your debt falls within legal limits.
- You want to protect your business assets while paying creditors.
With Chapter 13, you get three to five years to pay debts through a court-appointed trustee. During this time, you keep running your business while following a manageable payment schedule. Take note that Chapter 13 is not available for corporations or partnerships.
Understand your options
Financial decisions about your business deserve careful consideration and professional guidance. A bankruptcy attorney can help you evaluate your situation.