For small business owners particularly, bankruptcy is one of the most frightening and distasteful words in the English language. When you or your business are staring down the barrel of bankruptcy, it can seem like the end of the world. But bankruptcy is not necessarily the end of your business, and it is certainly not the end of your career; it is a financial tool designed to help you get your business and your finances back on the right track.
Depending on the type of business you own, the type of bankruptcy you plan to file, and several other aspects, you may be able to turn things around and rebuild a successful company. In fact, a study conducted by the US Small Business Administration (SBA) found that many small businesses with fewer than 500 employees were able to rebound into thriving companies within seven years of filing bankruptcy.
Even though it may feel as though the situation is hopeless when you are initially faced with the possibility of bankruptcy, it is important to take a breath, take a step back, evaluate your options realistically, and understand that the world is not coming to an end. The following text relates different types of bankruptcy and what they can mean for the future of your business.
Chapter 7
If the debts of your company are so overwhelming that restructuring is not possible, or the company does not have significant assets left, Chapter 7– or liquidation— may be the only option. In this case, your business is unfortunately over.
However, while this venture may have failed, many entrepreneurs have successfully built new companies within a few years of Chapter 7. Finding financing and willing vendors will be more difficult after you have liquidated a company, but that does not mean it is impossible. Strong relationships with vendors and partners in the industry will be invaluable in these cases, and you may be able to find financing in alternative options.
Chapter 11
If your company still has a realistic future, you could file Chapter 11 and remain operational. While this is the most complex and expensive type of bankruptcy that a business may undergo, ensuring the future of your company may make it worth the trouble. Whereas Chapter 7 forces you to liquidate your company to pay off overwhelming debts, Chapter 11 is a plan that restructures your company so it can pay creditors and rebuild into a successful company eventually.
With this type of bankruptcy, the court allows a company to be reorganized under the control of a court-appointed trustee, and in some cases, the court may even allow the owner of the company to be the trustee. Chapter 11 bankruptcies consist of very complicated, intricate plans, and you should always consult closely with attorneys to decide if this is the right path.
Chapter 13
Chapter 13 bankruptcy is typically reserved for personal consumers, but it can be a helpful tool if you are the sole proprietor of your business. This is usually considered personal bankruptcy, but it may be the right option if your personal and business finances are closely intermingled. In these cases, you would build and submit a repayment plan through the bankruptcy court, detailing how your debts can be repaid.
If you file Chapter 13 bankruptcy, you may be able to avoid losing your personal assets, your home and your business if you are the sole proprietor. However, once you file Chapter 13, it is crucial that you stick to the repayment plan that is laid out. Failing to stick to these terms could lead to Chapter 13 dismissal which would void the entire process and make you again liable for all debts, possibly leading to the seizure of your assets. Do not confuse this with Chapter 13 discharge, which involves the successful completion of the bankruptcy process.
Not the End
No matter the type of bankruptcy you file, it is important to understand that your career can continue. Any type of bankruptcy can make things more difficult for your business in the future, but these lessons will only make you stronger going forward.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.