Small Business Bankruptcy

Small businesses may be able to file several different types of bankruptcies, but what is generally known as a small business bankruptcy may not be the best option. The type of bankruptcy a debtor will consider for their small business will depend on whether their business is a sole proprietorship, general partnership, corporation, or limited liability company, and whether the business owner is personally liable for the business debts.

Additionally, whether the debtor wants to keep the business operating or they are planning to close the business and the amount and types of debts owed are also considered before deciding what type of bankruptcy to file.

Small businesses may be able to file Chapter 11 bankruptcy, Chapter 13 bankruptcy or Chapter 7 bankruptcy. Chapter 11 is generally for large businesses with a great deal of assets and debts. Chapter 11 is most suited for corporations that are considered separate legal "persons" from their owners. Chapter 11 will allow the business to continue to operate their business while creating a plan to repay debts.

Chapter 13 is the most common bankruptcy for small businesses. The assets are not sold, but the sole proprietors or self-employed individuals are allowed to create a repayment plan to repay debts over 3 or 5 years. Chapter 7 is a liquidation bankruptcy, and although some business owners may be able to file Chapter 7, after Chapter 7 it may become increasingly difficult to continue to operate a small business, especially if the tools for the business have been liquidated or sold.