Should Your Business File for Bankruptcy?
In most cases with the law, a company can do whatever a person can do. That includes filing for bankruptcy. Should your small business file for bankruptcy? Is bankruptcy a way out of your business’ debts?
Let’s clarify that we are talking about whether your business should file for bankruptcy—not whether you should file bankruptcy as an individual who owns a business. In other words, the name of your business is technically the debtor in the bankruptcy.
Disadvantages of Business Bankruptcies
There is one very big disadvantage with your business filing for Chapter 7 (or any kind of bankruptcy, other than Chapter 11): Business debts that your business incurred are not discharged in bankruptcy. For most people this is a dealbreaker, as the point of filing for bankruptcy is usually to get a discharge from creditors. A Chapter 7 bankruptcy will not accomplish this, and it is not a way for your business to “start fresh,” the way bankruptcy is for individuals.
An additional problem is that because you, individually, are not filing for bankruptcy, you still owe any debts that you incurred individually—for example, if you signed a personal guaranty on a business debt.
Something else to consider is that many of your business contracts, such as leases, may have provisions in them that declare your business in default if you file for bankruptcy, even if the bankruptcy does not actually discharge any debt. Again, if you are personally liable on any of those contracts, you could find yourself with a personal financial problem just because your business filed for bankruptcy and breached a contract.
The Positives of Business Chapter 7
Why would someone want their small business to file for Chapter 7 bankruptcy? In some cases, if your business has more debt than it can handle, and you want out of the business, Chapter 7 can be helpful.
In the Chapter 7, the trustee will take the business, liquidate and sell the assets, and provide whatever money there is to the creditors. The creditors get “off your back” and now deal with the trustee. You may have no idea how to take your property and liquidate it, nor do you have the money, time, or desire. But the Chapter 7 trustee does. Your business bankruptcy lets the trustee do the work for you and ensures that your creditors are being treated fairly so you can wind up the business and move on.
If there is nothing for the trustee to sell, in many cases your business creditors may leave you alone, confident that a neutral party—the trustee—went through the business’ assets and found nothing.
Creditors that see that a business filed for Chapter 7 are more likely to stop collecting, even though they legally can do so, as they know that your business just subjected itself to a Chapter 7 and is closing its doors.