The decision to file bankruptcy as a business owner is not an easy one to make. Filing bankruptcy is a time-consuming and expensive process, and one that can be a black mark on your credit, making it difficult to secure loans or other sources of funding in the future. However, if you truly cannot afford to pay your debts, bankruptcy can be a good option that allows you to get out from underneath the stress of mounting bills.
If you want to file business bankruptcy, you’ll need to understand your options, file a bankruptcy petition along with the necessary paperwork, and then adhere to the agreements set forth by your creditors and/or the bankruptcy court. I’ll detail each of these steps below.
Key takeaways:
- Filing bankruptcy is a time-consuming and costly process that can take anywhere from six months to five years or more, making it difficult to land loan approvals until several years after your bankruptcy has been discharged
- In addition to business assets, some personal assets may be subject to seizure if you file bankruptcy
- Different types of bankruptcy exist depending on how you want to manage your debt. A chapter 7 bankruptcy liquidates your debt and shuts down your business, while chapters 11 and 13 bankruptcies restructure your debt and allow your company to continue operating
Step 1: Consult with a financial advisor and attorney
Filing bankruptcy has significant legal and financial consequences, so it’s important to consult with a professional in each of these areas to better understand your options and the implications of a bankruptcy.
Financial advisor
A financial advisor can help you determine if there’s a way to avoid filing bankruptcy. Possible options can include refinancing debt to lower your rates and monthly payments, asking creditors to defer payments, or requesting loan modifications.
Even if you’re certain that there are no other options, a financial advisor can serve as a second set of eyes to confirm whether bankruptcy is your best bet. They can also provide input as to the aftermath of what you might be able to expect once the process is finished.
Bankruptcy attorney
A bankruptcy attorney is another individual I recommend you work with. Filing bankruptcy is a complex process, with steps and paperwork requirements that can vary based on your industry, your specific circumstances, and the jurisdiction you’re located in, among other things.
Depending on the type of bankruptcy you’ll be filing, they may also be able to help you negotiate your debts with creditors. Regardless, having a trusted professional in this function is key to ensure that you meet all of the deadlines and that any paperwork requirements are completed correctly.
Step 2: Understand your options for bankruptcy
Different types of bankruptcy exist. The most common ones are chapter 7, chapter 11, and chapter 13 bankruptcies. Typical use cases are noted below:
- Chapter 7 bankruptcy: Sole proprietors wanting to liquidate and close out the business
- Chapter 11 bankruptcy: Any business that wants to continue operating on a modified repayment plan
- Chapter 13 bankruptcy: Sole proprietors with a smaller amount of debt that want to continue operating on a modified repayment plan
The one you choose will have many legal and financial implications, such as how your debts will be handled and whether your business can continue operating. How your business is structured is something that can also determine which bankruptcy option you’re even eligible to file.
Chapter 7 | Chapter 11 | Chapter 13 | |
|---|---|---|---|
Debt Treatment | Assets liquidated to repay creditors | Restructured payment plan | Restructured payment plan |
Business Treatment | Business must be closed | Business can continue operating | Business can continue operating |
Available to Sole Proprietors? | Yes | Yes | Yes |
Available to Other Business Structures? | No | No | No |
Typical Timeframe to Completion | 3 - 6 months | 6 months - 5 years | 3 - 5 years |
Click on the headers below to understand more about how each bankruptcy type goes.
This is one of the most common forms of bankruptcy that’s filed throughout the United States. With a chapter 7 bankruptcy, your assets are liquidated in order to pay off balances owed to creditors, allowing you to start with a clean slate.
Although it’s typically filed by individuals, it’s also available to businesses structured as a sole proprietor. While sole proprietors have many benefits compared to other business structures, business owners should understand that one downside is that it has unlimited liability, which leaves your personal assets subject to liquidation. With that being said, state laws may protect some personal assets, such as homes and vehicles.
A chapter 11 bankruptcy is essentially a restructuring of the debt that your company owes. Restructuring of the debt usually involves reaching an agreement with your creditors as to the new debt repayment terms, such as the amount, frequency, and term. If the creditors and bankruptcy court agree to the new repayment terms, a chapter 11 bankruptcy allows your business to continue operating.
Be aware that with this type of bankruptcy, negotiations can be costly and time-consuming, as you’ve already breached the trust of creditors by failing to make the initial debt payments as agreed. Additionally, you must prove to the court that the repayment plan is feasible, and that you can generate a sufficient amount of revenue to make good on your debt payments.
This is similar to a chapter 11 bankruptcy, although often used for individuals rather than businesses as it has lower thresholds for outstanding debts. Based on current limits, you must have no more than $2.75 million in combined debts to be eligible for a chapter 13 bankruptcy.
With that being said, it is a viable option for sole proprietors that are willing and able to use personal income to repay these financial obligations. Due to the lower thresholds for debt to be eligible for this type of bankruptcy, it can be faster and less costly compared to a chapter 11 bankruptcy as it tends to be less complex.
Step 3: Gather your company’s financial information
To prepare for the next step involved with filing bankruptcy, you’ll need to gather various financial information about your business. This is because the following step involves completing credit counseling and filing bankruptcy petitions with your court, each of which often require supporting documentation.
Commonly required paperwork you should consider gathering include:
- Personal and business tax returns from the past 3 years
- Current financial statements (such as balance sheets, income statements, cash flow statements, and profit & loss statements)
- Details of all current assets and liabilities (such as appraisals, loan agreements, and lease agreements)
- Copy of all outstanding contracts
- Details of all payroll-related obligations (including employee benefits, such as insurance benefits)
Step 4: Complete credit counseling & file a bankruptcy petition with all applicable paperwork
The next step in filing bankruptcy is to determine if you need to complete credit counseling as part of filing your formal bankruptcy petition. The United States bankruptcy court requires this of all individual filers, and its website contains a list of all approved credit counseling providers, as this can vary based on where you’re located.
Once you’ve completed credit counseling, your next step will be to file a bankruptcy petition, bankruptcy forms, and any required paperwork. While the U.S. bankruptcy court website provides a list of all available bankruptcy forms, having a bankruptcy attorney here can be key to get guidance with ensuring you identify all required documents, and fill them in correctly.
Commonly required bankruptcy forms
The amount of paperwork and forms required can be extensive depending on the complexity of your case. It’s a big reason why I recommend working with a bankruptcy attorney, as they’ll be able to use their knowledge and experience to guide you through this process.
With that being said, below is a list of forms you may be required to complete:
- Voluntary petition for individuals (form B 101): This form requires you to provide basic identifying information about yourself, your reasons for filing bankruptcy, and details of your financial background and current status.
- Summary of assets and liabilities (form B 106Sum): This is a short form that is meant to summarize the amounts of your assets and liabilities.
- Schedule A/B property (form B 106A/B): Here, you can list various types of property currently owned, such as real estate, vehicles, personal and household items, and other financial assets.
- Schedule C exempt property (form B 106C): For this form, you can list any property you are claiming as exempt.
- Schedule D secured property claims (form B 106D): Here, you will list creditors that have claims secured by property.
- Schedule E/F unsecured claims (form B 106E/F): This form requires you to provide information about creditors that have unsecured claims against you.
- Schedule G contracts and unexpired leases (form B 106G): If you have any contracts or unexpired leases, you’ll need to provide those details using this form.
- Schedule H codebtors (form B 106H): If there are individuals other than yourself who are also liable for your debts, provide their details using this form.
- Schedule I income (form B 106I): You’ll use this form to list the details of your sources of income.
- Schedule J expenses (form B 106J): This form is to be used to provide a list of all of your monthly expenses.
- Statement of financial affairs (form B 107): This form is used to provide additional details about your financial standing.
- Statement of intention for Ch 7 BK (form B 108): Use this form to indicate how you intend to manage certain debts, such as whether you will be surrendering property, or if you plan on retaining it and redeeming the debt.
- Statement of current income for Ch 7 BK (form B 122A-1): Here, you’ll provide a summary of your current sources of monthly income.
- Statement of current income for Ch 13 BK (form B 122C-1): This form is used to provide a summary of your current monthly income.
- Calculation of disposable income for Ch 13 (form B 122C-2): Here, you’ll input your income and expenses in order to calculate your monthly disposable income.
- Voluntary petition for non-individuals (form B 201): This form requires you to provide basic information about your business and the reasons why bankruptcy is being considered.
- List of creditors with unsecured claims for Ch 11 BK (form B 104): For those filing Chapter 11 bankruptcy, this form allows you to list the 20 creditors that have the largest amounts of unsecured claims against you, who are also not insiders of the business.
- Statement of current income for Ch 11 BK (form B 122B): This form is used to provide a summary of your current monthly sources of income.
- Summary of assets and liabilities (form B 206Sum): This is a one-page form that requires you to summarize the amount of your assets and liabilities.
- Schedule A/B property (form B 206A/B): This form allows you to list all real estate and personal property that the business has an ownership interest in.
- Schedule D secured property claims (form B 206D): Here, you can list the creditors that have secured claims in property owned by the business.
- Schedule E/F unsecured claims (form B 206E/F): This form requires you to provide a list of the creditors that have unsecured claims against you.
- Schedule G contracts and unexpired leases (form B 206G): For this form, you’ll list details on any outstanding contracts or unexpired leases.
- Schedule H codebtors (form B 206H): Any individuals who are also financially liable for business debts should be listed on this form.
- Statement of financial affairs (form B 207): This form is intended to allow you the opportunity to provide details of your company’s financial status.
Step 5: Review from creditors and bankruptcy court
If you’re looking to stay in business and are trying to restructure your debt, the first step will be to have your creditors approve the repayment plan you’ve proposed. It’s not unusual for this to take some time, given that your credibility has already been damaged by being unable to repay debts as originally agreed. You’ll likely need to share your financials with your creditors and provide relevant information to document your ability and willingness to repay financial obligations on the new payment plan moving forward.
Regardless of the type of bankruptcy you’ll be filing, it will need to be reviewed for approval by the U.S. bankruptcy court in your jurisdiction. This review process is done in part to ensure that your motion to file bankruptcy is being made in good faith, seeing that you are asking to have your debt obligations reduced or eliminated.
Step 6: Repayment or liquidation of assets
Depending on the type of bankruptcy you’ve selected, the next step in the process is generally to either begin repayment of your business debts or have your assets liquidated. Chapter 11 and 13 bankruptcies are centered around having debts restructured, so once payment plans have been approved by both the court and creditors in the previous step, you can typically continue business operations as long as you meet the terms of the new payment schedules. Note that you may need to make regular reports to the bankruptcy court as a condition of approval of your bankruptcy filing.
Step 7: Completion of debtor education course if applicable
The U.S. bankruptcy court requires that all individual filers complete a debtor education course after you file bankruptcy. This is separate from any credit counseling course you may have previously taken. In addition to all other requirements set forth by the bankruptcy court, debtor education must be completed (if required) before debts can formally be discharged.
The U.S. Department of Justice provides a list of all approved debtor education courses.
Alternatives to filing bankruptcy
Before filing bankruptcy, consider some of the following strategies you can use to get your finances under control. One or a combination of these may help your budget to the point where you can get back on track with your debt obligations.
Negotiate terms with your creditors
Depending on the type of debt you have, you might be able to negotiate a modified repayment plan with your lender. Modified payment plans can include adjusted interest rates, loan terms, and monthly payment amounts. It can also include income-based repayment terms, graduated payment amounts, and balloon payments.
Refinance or consolidate your debt
Refinancing or consolidating higher-rate debt to a more affordable interest rate is something that can help lower your payment amounts to make it easier to meet the minimums due. Refinancing is also an opportunity to spread your payments over a longer period of time, something that can further help in lowering your required monthly payment amounts.
I recommend considering our picks of the best working capital loans, as funds can often be used for nearly any business-related purpose.
Restructure your business
Restructuring your business is done with the goal of either generating cash or lowering expenses to increase cash flow. This can be done by selling assets or eliminating costs that do not have a material impact on your company’s ability to operate. Some examples can include reducing or completely eliminating cleaning services, landscaping services, employee benefits, and more.
Frequently asked questions (FAQs)
A business bankruptcy occurs when the company declares that it can no longer meet its financial obligations to its creditors. Filing bankruptcy allows the company to receive protection from the court system against collection actions while the business completes the process of restructuring its debt or liquidating its assets to pay creditors.
It can take anywhere from several months to as long as five or more years for your bankruptcy to be finalized. Bankruptcies are finalized when your assets have been liquidated, or when you have satisfied the terms of repayment. Chapter 7 bankruptcies are typically completed within three to six months since they only involve the liquidation of assets. Chapter 11 and 13 bankruptcies take far longer as repayment periods tend to be between three and five years.
Bankruptcy should be considered as a last resort if you do not see a way to generate sufficient revenue to meet your debt obligations, and your creditors have refused to modify the repayment terms. You should also make sure that the benefits outweigh the downsides, as bankruptcy can be costly to your credit and finances.
Filing bankruptcy leaves a huge black mark on your credit, significantly lowering your credit score. Until you’ve re-established a positive credit history of repaying debt in a timely manner, filing bankruptcy can make it difficult to get approved for financing — and even then, it may be years before you’ll qualify for a lender’s best-advertised rates and terms.
Bottom line
Filing for bankruptcy is a time-consuming and expensive process. It can also make it difficult for you to get approved for loans as the bankruptcy will appear on your credit reports, a signal to creditors that you have mismanaged your finances in the past. However, doing so can help you get a clean start and reduce or eliminate debt that you otherwise would be unable to manage. If you’re thinking of filing for bankruptcy, I recommend consulting with a team of professionals before going this route.
