Commercial Bankruptcy

Choose a course of action Depending on their type and amount of debt, most businesses can file for any of three types of bankruptcy: Chapter 7, the purpose of which is to liquidate the debtor's assets, including the business; Chapter 11, which is designed to allow struggling businesses to reorganize; or Chapter 13, which is reserved for individuals, who may or may not have business debts.

I recommend:  A good bankruptcy lawyer can help you decide which type of bankruptcy is best for your situation. Find one online by searching the National Association of Consumer Bankruptcy Attorneys' (NACBA) Attorney Finder.

Attend credit counseling Under a law passed in 2005, debtors are required to attend an approved credit counseling class up to six months before filing for bankruptcy.

I recommend:  Satisfy the government's pre-filing credit counseling requirement by making an appointment with the Credit Counseling Center (CCC).

Initiate bankruptcy proceedings Either the debtor or creditors can initiate bankruptcy proceedings. Once you've filed, an 'automatic stay' takes effect and prohibits creditors from taking action to collect on the debts you owe them.

I recommend:  Bankruptcy proceedings are handled in bankruptcy courts within each of the country's 94 federal judicial districts. Find the bankruptcy court for your district online at USCourts.gov.

Reorganize your debts If you've filed for Chapter 11, you'll need to reorganize your debts, developing a plan to pay them. This might include closing stores, laying off employees, voiding contracts with suppliers or simply establishing a payment plan with your creditors.

I recommend:  Upon reorganizing debt, secured creditors – those that can claim collateral, such as your home or car, against you – are paid first, ahead of unsecured creditors. Read more about the differences between secured and unsecured debt in the CCH Business Owner's Toolkit.

Sell your assets If you've filed for Chapter 7, you must liquidate your assets. You can begin the process yourself, but once you've filed the court will appoint a trustee to manage the remainder of your liquidation. In Chapter 11 cases, the trustee oversees your reorganization plan.

I recommend:  Assets are typically sold via private auction or public estate sales, such as those advertised online at BankruptcySales.com. Any sale of assets is subject to taxes by the Internal Revenue Service (IRS), which outlines its bankruptcy policies in Publication 908.

Rebuild Bankruptcy stays on one's credit report for 10 years, but there is life after filing as bankruptcy can free you of bad contracts and hefty obligations, allowing you to push forward with a fresh start.

I recommend:  If you're truly intent on saving your business, make bankruptcy your last option. First, consider one the suggestions from AllBusiness' "Alternatives to Declaring Business Bankruptcy."