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Bankruptcy Options for the Small Business Owner

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Bankruptcy Options for the Small Business Owner

Published: March 24, 2010

Bankruptcy is never a “fun” topic to discuss. But if your small business is failing financially and you can’t pay your creditors, it is critical that you understand what bankruptcy is and how it works, and determine what bankruptcy options are available and helpful for your business model.

Choosing the right option can not only have a significant impact on your ability to retain your small business assets and avoid costly legal action, it can also affect any plans you may have to reorganize and rebuild your business in the future.

Bankruptcy may not, in fact, be the right option. Be sure to consult a lawyer and get good advice before contemplating bankruptcy. You can also refer to this online Bankruptcy Guide for Small Business Owners.

Here is some basic information about bankruptcy law and what to expect under the chapters available to small businesses.

Types of Bankruptcy

There are several types of bankruptcy that your business may file for and each is closely tied to how your business is structured.

Chapter 7 – More commonly referred to as liquidation, this bankruptcy route is appropriate when a business has no future and lacks substantial assets. Because of this, it is often suited to sole proprietorships and small businesses, when the company is essentially an extension of its particular owner’s skills. Under Chapter 7, the bankruptcy trustee will sell assets to satisfy outstanding debts and discharge debts that can't be satisfied with the available assets. More.

Chapter 11 – If your business has a plan for future recovery, Chapter 11 supports the continuation of a business under a reorganization plan. Although it can be a very complex process, Chapter 11 applies to sole proprietorships, corporations and partnerships. If you choose this option you can expect to operate under increased scrutiny from a court-appointed trustee. More.

Chapter 13 – Under Chapter 13, you file a repayment plan with the bankruptcy court detailing how you are going to repay your debts. Chapter 13 bankruptcy is a reorganization bankruptcy typically reserved for consumers, though it can be used for sole proprietorships. If your personal assets are tied in with your business assets, as in a sole proprietorship, you can avoid the risk of losing your house if you file Chapter 13 versus Chapter 7. More.

Chapter 12 - Chapter 12 is designed for 'family farmers' or 'family fishermen' with 'regular annual income”. Under Chapter 12, debtors propose a repayment plan to make installments to creditors over three to five years.

To help you determine which option – if any – is right for your business, Lawyers.com has some great resources that address common questions about bankruptcy and the small business, including:

  • Should the business be reorganized or liquidated?
  • How much of the business debt is 'secured'?
  • Does management have the resources and desire to engage in the reorganization process?
  • Is the business one that you could start up again after a liquidation of the current business?

There are also services that can assist small business owners with staying out of bankruptcy and repairing their credit rating after declaring bankruptcy. SCORE also has formed an alliance with Corporate Turnaround (formerly known as Commercial Credit Counseling Services, Inc.) to reach out to small businesses experiencing financial difficulties.

Other Resources

Message Edited by ChristineL on 12-13-2009 06:15 PM

About the Author:


If you are struggling with debt and are unable to pay your creditors then bankruptcy may provide you with some relief. To know all the legal aspects of the situation hire a Family Law Attorney who will take all your stress and deal with the situation in a legal way.
Great article. I like how well the article is organized into the different types of bankruptcies available for a business owner. As a bankruptcy lawyer in NYC, a Chapter 7 bankruptcy can do great justice for small business owners who have incurred debts on behalf of their business for which they are personally liable.
Sharing these kinds of legal affairs knowledge is a advantages for folks. May be they can get an idea forhow to file for bankruptcy
I saw many people who faces bankruptcy problems, they can make sure out of bankruptcy problems when they have choose great lawyer. Although these chapter 7,11,12 and 13 are not like general cases, too complex cases. thanks to share the best options.
1. When You give the hope to someone and then take the hope away it is very painful! 2. When You constantly make the bankruptcy procedure with the 1st, 2nd, … business it is very strange!
it's hard to deal with bankruptcy, too many laws and problems, better get professional help. the laws change continously and also depends on the state
thanks u for sharing..
it's hard to deal with bankruptcy, too many laws and problems, better get professional help. the laws change continously and also depends on the state
I never realized there were so many different types of bankruptcy a business could file if their small business isn't going to survive. Very informative post, and of course let's hope it doesn't get to that point for most small business owners.
Quite a lot of small companies are choosing forms bankruptcy liquidation, easy to implement without costly legal. Selecting the appropriate form of bankruptcy for the company to help the company save a lot of costs.


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