It’s happened. You took your chance at the dream business idea you had, and it didn’t work out. Sometimes, it’s a matter of the wrong place and the wrong time, perhaps you were hit with a crisis you couldn’t recover, or maybe your idea had flaws you didn’t see at first. Regardless, you may feel like you’re in limbo, but bankruptcy may give you the means to move onwards.
Know The Legal Lay Of The Land
Bankruptcy, an opportunity? It may sound rather strange, but it is true. By discharging your debts and getting creditors off of your back, you may have a moment of peace you hadn’t seen since your business started having trouble.
According to David M. Offen, a Philadelphia bankruptcy lawyer, “The type of business structure you have can help determine which type of bankruptcy is best for you. If you have a sole proprietorship or general partnership, you are personally liable for your business debts. If you are a limited partner or yours is a corporation or LLC (limited liability company), then your personal assets are not at risk. Sole proprietors can file for Chapter 13 bankruptcy, but partnerships, LLCs, and corporations cannot. Chapter 7 and Chapter 11 are available to all types of business structures.”
>> RELATED: Why Is My Profitable Business Going Broke?
You may be a bit confused here, though. What are all these different types? Here’s a basic breakdown:
Chapter 7:
This bankruptcy tends not to make the front page most of the time. Ironically, it is most likely Generally, it is suited for when the debts of the business are so overwhelming that restructuring is not a viable option. In addition, it is suited well for businesses that don’t have any substantial assets. When this takes place, a trustee is appointed by a bankruptcy court to take possession of the assets of the business and distribute them among the creditors. Following this distribution process and payment for the trustee, the business receives a discharge, releasing the owner from an obligation to their debts.
Chapter 11:
This option, probably the one you see in the news the most often, is generally reserved for larger corporations due to cost. However, it also gives you the greatest chance to continue on after bankruptcy. The business is reorganized under a trustee, who can sometimes be the owner. The company files a plan of reorganization outlining how it will deal with its creditors. Creditors will then vote on it, and a court will approve it if they find it fair and equitable. Get ready to wait, though, as it generally takes a year or more to confirm a plan.
Chapter 13:
Out of the three, this option is the most unique. While it’s generally intended for consumers, you could turn it around for your business if you run a sole proprietorship. When you file, you provide a repayment plan with the bankruptcy court detailing how you are going to repay your debts. This would allow you to avoid losing personal assets that may be tied to your business.
What Comes Next
For small business owners, generally, the best time to enter into bankruptcy is if your personal assets are at risk. Otherwise, it may make more sense to walk away. When you enter into the process, you will generally start by filing bankruptcy with a court. You can file on your own or you can file with an attorney. Bankruptcy costs include attorney fees and filing fees. If you file on your own, you will still be responsible for filing fees. As a result, you may want to bring on an attorney. Their counsel will help you throughout the process.
>> RELATED: 10 Simple Ways to Repair Your Credit
There are also plenty of other decisions you need to make as well. For example, should you pop right back up and try another go at business, or maybe lay low for a bit? After the legal process settles down, you need to take a moment to do a bit of self-reflection and figure out where things went wrong. Were you out of touch with your customer base? Was your product able to stand out?
At the same time, you may want to consider getting another full-time job. Yes, it may feel like a failure, but bankruptcy won’t affect your eligibility for most jobs like it may for applying for another loan to start a business. In addition, this may just be a stopgap for you, giving you time to get a solid financial base. In fact, being back in the work world may help you put together new contacts and skills that will serve you well if you choose to strike out again in the future.
