Is Bankruptcy the Right for Your Struggling Small Business

Submitted by Rachel R on Thu, 04/23/2015 - 12:47pm

Is Bankruptcy the Right for Your Struggling Small Business

Is your small business struggling? Should you file bankruptcy?

Image Source: Flickr User Chris Chan

Small businesses struggle and fail for many reasons – some that are out of your hands as a small biz owner. If your business is not doing well, you may be trying everything to keep it afloat, but it may not be salvageable. Bankruptcy may be a good solution in some cases, but it's not always the best choice. There are also different bankruptcy chapters, and one may be a better fit than another. Sometimes there's no need to file bankruptcy, and you can just close the doors with no further worries.

Are your assets at risk?

If your personal assets are tied to the business, bankruptcy may be a good way to protect yourself. If, however, you own a limited liability business, you may be able to shutter the business if there's no personal recourse for any business liabilities. When your business is a corporation or an LLC, your personal assets are usually shielded from your business creditors. On the other hand, owners of partnerships and sole proprietorships may have personal assets on the line.

Even if your business was incorporated in such a way that it should protect your assets, if you don't run it properly, the shield can be penetrated. The most common issue is when you blend personal and business finances. For instance, if you pay business bills from a personal account or credit card, you can complicate your financial situation - this is called piercing the corporate veil. Your personal assets may also be at risk if your business creditors required a “personal guarantee.”

Personal guarantees often a requirement for newer businesses or those with limited (or no) credit history. For significant lines of credit, lenders may ask you to use your house or another major asset as collateral. If you can't pay your business debts, the creditor can then go after whatever assets you pledged as collateral. If this is your circumstance, a well-times bankruptcy can mean the difference between losing your business and home or walking away with a clean financial slate.

What type of bankruptcy should you file?

When you think business bankruptcy, Chapter 11 may be what springs to mind. That's the form of bankruptcy that big businesses use, but for most small businesses, it's not a viable option. Here's why. Chapter 11 is expensive and takes a long time. Essentially, it's a reorganization plan that allows you to catch up on bills, but for most small biz owners, it's just not a fit. The exception is if you have income from other sources and high net worth that makes personal bankruptcy impractical.

In most situations, Chapter 7 or 13 are more feasible. Chapter 13 will give you more time to catch up on bills in case your business can be saved. Chapter 7 allows you to close the doors and have the business debts wiped out. Your assets, debts and other income are factors will determine whether you are eligible for a Chapter 7. The bankruptcy court may push you toward one option or the other.

The good news is that filing business bankruptcy will not prevent you from giving entrepreneurship another go at some point. Case in point, Donald Trump has filed business bankruptcy four separate times, and it hasn't slowed his roll at all. In fact, he's considered quite the success. If a business is salvageable, it makes sense to try and press forward. But in other cases, it may be better to cut your losses and try again later.

If your North Carolina small business is struggling, contact the law offices of John T Orcutt for a free consultation on how bankruptcy can help you regain your financial footing. Call +1-919-646-2654 to speak with a North Carolina bankruptcy expert. We have convenient locations in Greensboro, Raleigh, Fayetteville, Garner, Wilson and Durham.

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