All business owners set out to succeed. The reality is, however, that some fail. If you're one of them, it helps to know your options, perhaps the most drastic of which — and potentially the most helpful, too — is bankruptcy. It's a worst-case scenario, sure, but as the old adage goes, it's better to be safe than sorry. Knowing how bankruptcy can help in times of crisis will ensure that you weather the storm rather than drown in it. After all, bankruptcy can discharge you from paying many business debts; remember, however, that it cannot release you from paying:
- Child support
- Student loans
- Secured debt
Choose a course of actionDepending 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.
Attend credit counselingUnder a law passed in 2005, debtors are required to attend an approved credit counseling class up to six months before filing for bankruptcy.
Initiate bankruptcy proceedingsEither 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.
Reorganize your debtsIf 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.
Sell your assetsIf 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.