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Should Your Business File for Bankruptcy?

By Brett Snider, Esq. on April 16, 2014 | Last updated on March 21, 2019

Should your small business file for bankruptcy? If you find yourself asking this question, you're not alone.

Filing for bankruptcy doesn't necessarily mean throwing in the towel. On the contrary, it may just mean a fresh start for you and your business.

Here are five factors to mull over when deciding if your business should file for bankruptcy:

1. Business Bankruptcies Pretty Much Mandate an Attorney.

Personal bankruptcies can sometimes be handled by individuals without professional legal help, but the stakes are even higher when it comes to business bankruptcies. Your small business is likely to be intimately entwined with your personal finances, and a proper bankruptcy attorney can help you sort out these complications.

2. Sole Proprietors May Lose Their Personal Assets.

If your small business is a sole proprietorship, filing for bankruptcy may mean allowing creditors to go after your personal assets. Not only is this one of the reasons for incorporating, but filing for bankruptcy as a sole proprietor may not be much different than filing for personal bankruptcy under Chapter 7 or Chapter 13.

3. Businesses Can File for Chapter 11 Bankruptcy.

Unlike Chapter 13 or Chapter 7, a Chapter 11 bankruptcy allows a business to hold off creditors for a little while longer to prove that your company can turn a profit. Unfortunately, this option is pretty expensive, which may make it less attractive to smaller businesses.

4. Chapter 7: The End or the Beginning?

Some business owners may choose liquidation under Chapter 7, which for small-time employers may mean the effective end of their businesses. However, liquidation also means the ability to start fresh with a new venture and the time to re-examine the business strategies that failed to deliver in the old business.

You may have issues with loans and credit, but the opportunity to start fresh also means potential new investors.

5. Timing Is Crucial.

Most business owners may define their success based on current cash flow, but a struggling business can often limp along for years before dying a quiet death. By then, potential opportunities for change may have dried up. According to a Small Business Administration (SBA) study, 70 percent of business owners who file for bankruptcy are able to reorganize or liquidate their businesses successfully.

Only you can decide if filing bankruptcy is appropriate for your business, but it can afford you many financial options.

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Editor's Note, April 19, 2016: This post was first published in April 2014. It has since been updated.

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