Small business bankruptcy

All entrepreneurs tend to view small business bankruptcy as a worst case scenario. But if you trust yours truly, then bankruptcy is a better choice than becoming an inmate of a debtors prison!!

Not very long ago, people who failed to pay their debts were neatly locked away in prisons and survived on a princely diet of bread and water. This scenario of being sent to a prison for failing to pay your debt may not be applicable nowadays, but even today, if your small business bankruptcy fails, you will have to face daunting financial hardships. But at least, you wont be packed to a jail and your creditors will be reimbursed in a fair and equitable manner.

So if things failed to went according to plan and you find that your business is in serious financial trouble, how will you find out whether filing for bankruptcy has become a necessity or not. Let us try and answer this question.

* First of all, what is the exact nature of your business enterprise. Is it a corporation, partnership or proprietorship. Corporations and partnerships are independent entities in the eyes of the law and have an existence separate from the shareholders or partners. Thus, corporations and partnerships, in case they land in some serious trouble, can file for Chapter 7 or Chapter 11 bankruptcy in their own right.

But in case of partnership, there is an additional point to be considered. What happens if the assets of the partnership are insufficient to pay all the debts of that partnership. In this case the bankruptcy trustee, because he/she has to make sure that all creditors of the partnership are paid as much as possible, will sue the general partners of the partnership.

In case of proprietorship, they are considered mere extensions of the owner and cant file for bankruptcy in their own right. It is the proprietor who will file for bankruptcy because the property and debts of a proprietorship business are nothing but the assets owned by the proprietor. As an individual, the owner can file for Chapter 7, Chapter 11 or Chapter 13 bankruptcy, provided the debts of the proprietorship dont exceed the limit set by Chapter 13.

* Next, ask yourself, which course of action appears more logical to you to liquidate the business or try to reorganize it. To answer this question, correctly identify the factors which caused the problems your business is facing at present and how bright are the prospects for change.

If your business is in doldrums because the market for your product is not big enough to make it profitable, or if you dont possess the skill set required to run a particular business, even if you get a chance to reorganize, will it serve any real purpose apart from providing temporary, short-term relief.

However, if you feel that your business can see a turnaround if you can free up some cash, reject leases or contracts no longer serving any purpose, and prevent asset and cash loss to creditors collection activities, then reorganization can help you achieve these objectives.

* How much of your business debt is secured. A secured debt is one in which the creditors claim is backed by collateral. In case you filed for bankruptcy, secured creditors will be paid before unsecured ones. To pay them, the trustee will give that item to the secured creditor which served as its collateral. If even after giving the collateral to the secured creditor, the full amount is still not repaid, the remaining debt will be transferred to the category of the unsecured debts of the small business bankruptcy such as credit cards and utility bills.

* Do you have the resources and the desire to engage in a lengthy reorganization process. When thinking of filing for a Chapter 11 i.e. reorganization bankruptcy, keep in mind that this reorganization will require significant investment of time and efforts from your part. The Chapter 11 bargain is that the bankruptcy court will stop your creditors from undertaking collection activities and will provide you other bankruptcy protection. In exchange, you will completely disclose the financial condition of your company before your creditors and the court and you will have to do this not only at the beginning of the bankruptcy process but on a monthly basis thereafter. So as long as the bankruptcy process is ongoing, you are expected to perform a fiduciary duty to your creditors by keeping them highly informed about the latest condition of your business and protecting their interest before your own.

Now, you can easily judge that reorganization can prove to be another big stress for your already stressed small business because you or your management personnel will have to devote time and attention to participate in small business bankruptcy proceedings, besides paying significant legal expenses. It is no wonder then that most such reorganizations fail because they fail in solving the underlying business problems.

* If you liquidate your current business, will you be able to start up again after bankruptcy if you so desire If your small business requires little capital and a few assets to start and is basically an extension of your own skills, what is the point in trying to reorganize it.

If such a small business is in serious financial trouble, better liquidate it through bankruptcy and start afresh.

However, if your business is not really that small, then starting again may prove to be quite a task and if you are not too sure yourself, better get good professional advice before deciding on anything.

In any case, if you think your business has no future, there are not many costly or substantial assets that cannot be reproduced or if the business is so deep in debt that trying to restructure all that debt looks highly unfeasible, then it's better to file for a Chapter 7 bankruptcy. This will make sure that your business is liquidated in an orderly manner under the supervision of a trustee and without causing any trouble for the shareholders. Creditors will also feel assured that they will be paid to the extent possible, depending upon the available assets and the priority of their claim.

True, thinking about filing for bankruptcy for your own business is never an easy decision. But as an entrepreneur, you must always be well informed that if things do reached such a state, what can happen to you and your business.

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