When Should a Business File Bankruptcy?

There are a number of different reasons that a business might choose to file for bankruptcy, and it is usually beyond the control of the business owner. For example, a number of businesses are choosing to file for bankruptcy right now, due to the COVID-19 crisis and the shelter-in-place that has been occurring in most states across the country for the past few months. If you are a business owner struggling with financial hardships during the COVID-19 crisis, you might be reviewing your financial options and wondering when should a business file bankruptcy.

When should your business file for bankruptcy?

You should consider filing your business for bankruptcy if your business is financially struggling and your own personal assets are at risk of being taken by creditors, which depends on the type of business structure that you have. For example, if you own a sole proprietorship, you are the sole owner of your business and you are therefore liable for the business’ financial problems and your own personal assets could be at risk of seizure from creditors if your business fails.

Bankruptcy gets a bad rap, but it’s actually a great way to protect yourself from financial ruin if your business fails. Just because your business fails doesn’t mean that you should lose all of your assets, so bankruptcy is a great option if you are at risk of your personal assets being taken by creditors.

That being said, if your business is registered as a limited liability corporation, also known as an LLC, you most likely don’t need to file for bankruptcy. The liability is on your business rather than you as the business owner, so your own personal assets are not at risk of being seized. Creditors are not allowed to touch your personal assets when your LLC fails. 

Instead, you can simply close your business and walk away, and there is no need to file for bankruptcy. Filing for bankruptcy in this case would actually be completely unnecessary. While it’s always best to settle your debts and pay your creditors when you can, if you are unable to do so, you are not personally liable.

Now that you know when should a business file bankruptcy, let’s discuss which type of bankruptcy is best for you and your business.

Which type of bankruptcy is best for you?

When you decide to file your business for bankruptcy, you need to decide which type of bankruptcy to file. There are a number of different options, including Chapter 7, Chapter 11 and Chapter 13.

• Chapter 11 bankruptcy. Chapter 11 bankruptcy is typically for larger companies and corporations, especially those companies that are publicly traded, so it is very unlikely that a small business would file a Chapter 11 bankruptcy. Chapter 11 bankruptcies are pretty expensive and take a lot of time. If you have a regular steady income and a pretty high personal net worth, you might want to consider filing Chapter 11. That being said, most business owners, especially those filing for bankruptcy, will not fall into that category, so you will probably want to file for a Chapter 7 bankruptcy or Chapter 13 bankruptcy instead.
• Chapter 7 bankruptcy. During a Chapter 7 bankruptcy, everything in your business will be liquidated and your business will close. This is usually the easiest and most simple type of bankruptcy to file. Both individuals and businesses choose to file Chapter 7 bankruptcies. The process is much less expensive and time-consuming than other forms of bankruptcy, so you can very quickly close your business and move on with your life. While a Chapter 7 bankruptcy hits your credit pretty hard, it’s a great option for a lot of business owners, especially those who can’t afford to pay their monthly bills or continue their business.
• Chapter 13 bankruptcy. If you really want to keep your business but just need some help getting your finances back on track, you should consider filing your business for a Chapter 13 bankruptcy. With a Chapter 13 bankruptcy, you will create a repayment plan with your creditors and your business is allowed to continue operating. Unfortunately, you will most likely need to pay most of your profits out to creditors for quite some time, based on the agreement you come to in bankruptcy court. That being said, this is a great option for businesses that are simply going through a rough patch, as may be the case right now during the COVID-19 crisis. If your business has a lot of income and assets and fairly low amount of debt, you are most likely a good candidate for a Chapter 13 bankruptcy filing.

What are the first steps for bankruptcy filing?

If you have come to the decision that filing for bankruptcy is the right choice for you and your business, then it is super important that you handle the filing process the right way. First, you need to consult with a bankruptcy attorney, like Van Horn Law Group, who handles business bankruptcy filings. Do not try to file for bankruptcy yourself! It can lead to some pretty serious financial and legal issues. Instead, it is super important that you choose a bankruptcy attorney who can help make the filing process as simple and seamless for you as possible.

Once you have met with your bankruptcy attorney, you will likely need to fill out some forms or worksheets and provide some documentation in order to complete the petition that you give to the court to ask the judge to grant your business the chapter of bankruptcy you and your attorney have decided to file. You will also likely create some payment schedules with your attorney to address repayment and other issues around your bankruptcy.