Bankruptcy Basics for the Small Business Owner Skip to main content

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Bankruptcy Basics for the Small Business Owner


Exacerbated by the recent recession, self-employed or small business owners everywhere are facing fewer credit options, high health care costs, and lagging consumer spending. Those struggling to stay afloat in these tough financial times must ask themselves even tougher questions. Do I have the motivation to continue my business? Could the business prosper if it wasn’t keeping up with old debts? Could my business persevere if it shed equipment, employees or space? Could I sell my business? Could I start another business if I did sell?

If after answering these questions you find you are no longer able to sustain or expand your business in your current financial situation, filing for bankruptcy may be your best bet.

For those business people who no longer have the time, energy or drive to continue their business interests in their current capacity, Chapter 7 bankruptcy liquidates business assets to repay looming debts. A court-appointed agent will sell these assets and pay the proceeds to creditors; beginning with secured creditors first, followed by any unsecured creditors. While this type of bankruptcy normally leads to the demise of the business, it, in turn, provides a quick resolution for individuals and a dependable dissolution for partnerships and corporations.

In the alternative, for business owners seeking solutions to the very problems that led to bankruptcy, Chapter 11 allows for a much-needed financial reorganization. Following a Chapter 11 filing, the court appoints a conservator who, like the agent in the previous example, oversees the business assets to best pay off creditors, while still keeping the business afloat. In short, Chapter 11 stops creditors, allowing the court-appointed conservator to reorganize and optimize business finances for a better future.

The best part for self-employed and small business owners filing Chapter 11 is that they can legally continue operating their business and earning an income as a “debtor in possession,” receiving the benefits of “automatic stay” protection. Debtors in possession are protected from creditor actions such as lawsuits and asset seizures, even if a creditor obtained a judgment before the bankruptcy filing. An added benefit of filing bankruptcy as a debtor in possession is that bankruptcy law allows you to take out more loans that take precedence over all other creditors.

Conversely, like businesspeople filing for Chapter 7, Chapter 11 debtors in possession are bound by specific bankruptcy rules and restrictions, including prohibitions on using encumbered assets as collateral and selling assets without the approval of interested creditors. As a result, the best move a bankruptcy bound small business owner can make is to consult an experienced bankruptcy attorney who specializes in representing small business owners.

While a bankruptcy for your business is sometimes advisable, many small business owners don't have any assets left and don't intend to continue the business, or intend to continue under a different name. If so, it may make more sense to simply let the corporation die on its own without a bankruptcy. However, if you're like most small business owners, you have probably personally guaranteed most, if not all, of your business debt. While a business bankruptcy will effectively hold off creditors from getting to your business, those same creditors can choose to pursue you personally. Whether you are dissolving the business or continuing on, its important to pull your credit report to determine how much of your debt has been personally guaranteed. Your attorney can then advise you how a personal bankruptcy can save you and your family from your business creditors.

Skilled bankruptcy attorneys like those at The Law Offices of John T. Orcutt can get to work early, navigate any uncertain waters of bankruptcy court and work in your best interests during the duration of your business and/or personal bankruptcy. In North Carolina, call +1-919-646-2654 to discuss your situation today. Always a free initial consultation.

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