Budding entrepreneurs likely hear advice from well-meaning people to not start or expand a business in an era of economic challenge. However, fewer businesses are declaring bankruptcy in the 2000s than in the 1980s and 1990s, according to statistics published by the American Bankruptcy Institute. Sometimes small businesses fail despite an entrepreneur’s most sincere efforts; bankruptcy can help lessen the financial and emotional strain even during challenging circumstances.
If you are willing to close your business without losing your personal assets, Chapter 7 bankruptcy may be an option. A small business owner who files Chapter 7 agrees to allow a court trustee to liquidate company assets such as equipment. Any proceeds will first go to creditors with interest in collateral such as a vehicle or real estate. Even if the liquidation does not cover all of your company’s debts, a successful Chapter 7 bankruptcy will permanently free you from paying business obligations that existed at the time of your case filing.
Chapter 11 is typically reserved for publicly held companies, though some small business owners may decide to apply for this type of debt relief. You still have the option to run your company if you can successfully adhere to the guidelines of a Chapter 11 “reorganization.” All major business decisions, especially the sale of assets, must be approved by a federal trustee. While some small businesses successfully move forward after Chapter 11, other companies close operations but are freed of related financial obligations.
In some cases, the fact that you filed business bankruptcy will impact your personal credit rating. If you are a self-employed professional or sole proprietor, then the fact that you filed bankruptcy will likely impact your credit rating for up to 10 years. Sole proprietors do not have the legal protections that corporation owners typically enjoy. In some cases, corporation owners who file Chapter 7 or Chapter 11 bankruptcy can have their business problems impact their personal credit ratings. If you signed a personal guaranty to secure credit for your business, then your bankruptcy case will likely damage your ability to get credit for your family or a new business venture for the next decade.
U.S. Securities and Exchange Commission: Corporate Bankruptcy
Credit Score Resource: Are Credit Rating Agencies Regulated?
American Bankruptcy Institute: Annual and Quarterly U.S. Bankruptcy Statistics