As a small business owner, you know the importance of always looking to the future. For business owners, entrepreneurs, and freelancers, everyday is a hustle. And when you’re starting to experience financial strain in your professional or personal life, you know that thinking ahead may include considering all of your options for meaningful financial relief — including exploring the types of bankruptcy that can benefit small business owners. 

If you’re a small business owner facing the prospect of mounting debt, it’s important to think about bankruptcy as an option for relief. Depending on your circumstances, bankruptcy may be a way to quickly and efficiently liquidate assets and discharge many of your debts, allowing you to close your business swiftly and transparently. In other cases, pursuing bankruptcy may even provide a path forward that can allow you to continue operating your business well into the future. 

As you begin to look into bankruptcy, you’re bound to have questions and concerns. One common point of consideration is which type of bankruptcy may be the right course of action for you. Generally speaking, small business owners may have a few different options to consider based on their circumstances, including Chapter 7 and Chapter 13

Ultimately, finding a solution that works for your needs will mean closely considering the unique variables of your situation, including: 

  • The structure of your business
  • The amount of debt you have
  • The amount, type, and value of your assets
  • Your future goals — particularly whether or not your aim is to continue running the business moving forward. 

Interested in exploring all of your options? Let’s take a brief look at two of the most common types of bankruptcy — Chapter 13 and Chapter 7 — and what they might mean for small business owners: 

Chapter 13 Bankruptcy: Advantages and Drawbacks for Small Business Owners

Chapter 13 is not a form of business bankruptcy. Only individuals may file for Chapter 13; it cannot be employed by partnerships, corporations, or limited liability companies (LLCs). With that said, this common form of bankruptcy can provide significant benefits to individual business owners, particularly those who own and operate their business as a sole proprietorship. 

Also commonly called “reorganization” bankruptcy, Chapter 13 allows debtors to reorganize their debts and pay them down with a strict monthly repayment plan, typically lasting between three to five years. At the end of this process, remaining debts may be discharged, as necessary and applicable. 

Sole proprietors can often reorganize both personal and business debts under Chapter 13. One of the primary advantages of a Chapter 13 bankruptcy is that it allows the debtor to keep their assets and pay off their debts over a set period of time. In some cases, this may allow small business owners to protect their business assets and continue to operate their enterprise (in order to generate enough income to make the repayment plan viable). 

In situations where the debtor is involved with a business that is a separate entity, such as a partnership or corporation, they may be able to reorganize and discharge their personal liability for business debts, without necessarily affecting the company. WIth that said, the business will remain responsible for paying back its debts separately.  

Chapter 7 Bankruptcy: Key Considerations for Businesses and Business Owners

Broadly speaking, Chapter 7 is an option for both individuals and business entities, including corporations and LLCs. In some cases, small business owners may be able to choose between filing for Chapter 7 on behalf of their business, or for themselves. However, sole proprietors will generally use Chapter 7 to resolve both business and personal debt matters in the same case. 

Also sometimes known as “liquidation” bankruptcy, Chapter 7 bankruptcy bestows a trustee with the power to collect and liquidate non-exempt assets on behalf of the debtor, in order to pay down their obligations to creditors. At the end of this process, many outstanding debts can be automatically discharged. Generally speaking, Chapter 7 is a fairly swift process, and can be completed in a matter of months. 

For business entities, Chapter 7 comes with some additional caveats to consider. For one thing, businesses will not receive a discharge of debt in Chapter 7, and the options for exemptions are significantly more limited. As a result, the trustee’s role will be to sell all of the business’ assets to pay creditors, generally shuttering the business in the process. As a result, some businesses prefer to forego Chapter 7, and proceed with liquidating and closing down themselves, without involving a trustee. In other cases, business owners may opt for Chapter 7 in order to have a swift shutdown overseen by a third party, freeing them up to focus on other things. 

Chapter 7 can offer some relief to small business owners operating a sole proprietorship. In this case, the debtor can typically use Chapter 7 to discharge both personal and business debts in a single case. What’s more, if a debtor’s business debts exceeds their personal debts, they can bypass the Chapter 7 means test and its income requirements. Debtors may also be able to take advantage of bankruptcy exemptions, allowing them to protect both personal and business assets. In the case of individual service providers with limited business assets (think copywriters, designers, or consultants), this may mean that they can continue operations after eliminating or reducing their business debts in bankruptcy, in some cases. 

A Brief Note on Chapter 11 Bankruptcy for Small Businesses

Chapter 11 bankruptcy is a third form of bankruptcy that business owners may consider — but it’s a unique animal, and will only be applicable in a more limited set of circumstances. 

Chapter 11 is a type of reorganization bankruptcy for businesses, including sole proprietorships, that have a legitimate chance at continuing operations into the future. Chapter 11 bankruptcy can be incredibly complex, and may affect a business’ operations for years, or even decades. 

The process generally involves creating and executing a reorganization plan (which may include laying off employees or closing locations), which must be approved by creditors and other stakeholders and be overseen by a trustee or a debtor-in-possession. In many cases, Chapter 11 is often too cost-prohibitive and complex for small businesses. However, if you think Chapter 11 may be a potential course of action for you, it’s worth discussing your thoughts with an experienced bankruptcy attorney in your area. 

Want to Continue the Discussion?

Are you a small business owner interested in learning more about Chapter 7, Chapter 13, or any aspect of the bankruptcy process in Chicago?  In many ways, the best way to determine if you qualify for bankruptcy — and what strategies to pursue — may be to consult with an experienced legal professional in your area. 

With an experienced bankruptcy attorney on your side, there is no need to search for all the variables and hope you don’t miss any key detail, or waste your time seeking out costly and ineffective third party solutions. Instead, an attorney can help you pursue the right course of action for your unique financial situation. At the same time, a legal professional can offer the force of law to protect you from debt collectors and creditors, all while being held to a higher standard by the state and ethics review boards than private operators.

Looking to get a better understanding of bankruptcy for small business owners? Do not hesitate to get in touch with the Gunderson Law Firm to keep the conversation going. 

At the Gunderson Law Firm, we strive to protect our clients’ assets to the full extent allowed by today’s laws, helping them get the debt relief they not only need, but genuinely deserve. We will take all steps possible to protect you and your assets throughout the entire bankruptcy process, while also counseling you on realistic ways to avoid such serious debt issues in the future. 

Whether you are a business owner, a wage earner, retired, or otherwise, we can address your specific situation with a strategic plan to help put severe indebtedness behind you, so you can truly enjoy life again. Don’t hesitate to drop us a line whenever you’re ready to continue the discussion.