When Should a Small Business File for Bankruptcy?

When Should a Small Business File for Bankruptcy?

Despite your best efforts, unforeseen challenges such as economic downturns, serious illnesses, or employee and management issues can place your business in a situation where you can no longer meet your financial obligations.  When you have done everything possible to recover and you are still overwhelmed with debt, it may be time for your small business to file for bankruptcy.  Bankruptcy, a legal way to have debts forgiven, may be able to give you and your business the fresh start needed to get it going again. If you successfully complete your bankruptcy plan, you have a good chance of getting on the right track and winding up profitable in the end.

However, filing for bankruptcy should not be taken lightly, as doing so has repercussions for years to come. It is a good idea to consult with an experienced business attorney, financial advisor, or accountant to assess your specific situation before making this decision.

When is Filing Bankruptcy Right for My Small Business?

Deciding if it is the right time to file for bankruptcy is a difficult decision, but there are several situations where bankruptcy is probably the best option for a small business. In general, bankruptcy may be the answer if:

  1. Debts are Overwhelming: Your business is unable to pay its debts, and you are being bombarded with bills and facing legal actions or aggressive collection efforts from creditors.
  2. No Successful Recovery Plan: You have tried several options but have been unable to come up with a successful plan for the business to recover and become profitable again.
  3. Lack of Cash Flow: You have ongoing cash flow issues that make it difficult to meet payroll and operational expenses, and bills keep mounting.
  4. Legal Compliance Issues: The business is unable to meet its legal obligations, contracts, and compliance requirements.

Your business attorney or financial advisor can help analyze your situation so you have the information necessary to decide if the time is right to file for bankruptcy.

What are Bankruptcy Options for Small Businesses?

Under federal bankruptcy code (Title 11 United States Code), small businesses have several options when considering filing for bankruptcy. The one that is best for you will depend on factors such as how your business is organized and operated and the amount and type of accumulated debt and assets you have.

Referred to by the chapter of the Bankruptcy Code that authorizes them, bankruptcy filing options include:

Chapter 7 Bankruptcy: A Chapter 7 business bankruptcy is designed for a business that cannot repay its debts because it can no longer maintain operations and earn revenue. The company generally shuts down and a court-appointed trustee liquidates its assets and repays some creditors with the proceeds. While Chapter 7 usually requires closing your business, there are exceptions for sole proprietors who may file simultaneous Chapter 7 bankruptcies for themselves and their business and thereby wind up keeping assets that are “exempt.” Once debts have been discharged in bankruptcy, you have no liability for them, and you may be able to continue to operate your business.

If your business is a corporation or LLC, there are no exempt assets, so all business assets are liquidated by the bankruptcy trustee and the business is closed.

Chapter 11 Bankruptcy: Chapter 11 bankruptcy is a business reorganization plan. The business continues operations, and it can restructure debts and renegotiate contracts under the supervision of the bankruptcy court, while developing a plan to repay creditors over a period of time. While Chapter 11 is usually for larger corporations, small businesses may find it useful if they have the potential for recovery and wish to continue operations. However, Chapter 11 can be a complex and costly process, and the business must propose a reorganization plan that is acceptable to creditors and the court.

  • Subchapter V of Chapter 11, otherwise known as the Small Business Reorganization Act of 2019, is a more cost-efficient and streamlined process for small business debtors.  This sub-part of Chapter 11 is usually beneficial for small businesses that qualify for this option, due to the lower costs and quicker pace of the bankruptcy case.

Chapter 13 Bankruptcy: Chapter 13 provides a structured plan for debt repayment over a period of three to five years while allowing the business to continue operations. Chapter 13 bankruptcy is primarily designed for individuals, but sole proprietors can use it to reorganize and repay both personal and business debts through a court-approved repayment plan. You may be able to protect your assets by filing for Chapter 13, and an automatic stay goes into effect so that creditors cannot seize your home, assets, or property while the stay is in effect.

Chapter 12 bankruptcy for family farmer or fisherman: Chapter 12 bankruptcy allows family farmers and fishermen with regular income to restructure debts and continue operations. Under Chapter 12, you come up with a plan to repay creditors over a 3-to 5-year period under terms that are more favorable for reorganization and less complicated and expensive than a Chapter 11 proceeding.

What a Small Business Can Do to Determine When to File for Bankruptcy

When considering filing for small-business bankruptcy, there are steps you can take to help determine when you should file.  You should:

  • Assess your financial situation. Get professional help to conduct a thorough analysis of the company’s assets, liabilities, income, and expenses to determine if there are still things you can do to avoid bankruptcy.
  • Determine which chapter to file under. If bankruptcy is your best option, decide on which chapter is appropriate for the specific circumstances of your business. In general, Chapter 7 involves liquidation of assets to repay creditors and may require closing your business; Chapter 11 involves a repayment plan for reorganization where businesses can usually continue operations; and Chapter 13 is designed for individuals or sole proprietors with a regular income.
  • Get help from an experienced small-business lawyer. Once you determine that bankruptcy is right for your situation, an experienced bankruptcy lawyer can help by
    • Navigating all filings and legal procedures so that all required documentation and paperwork is accurate and submitted within the specified timelines.
    • Negotiating with creditors to reach favorable terms that can help the business emerge from bankruptcy with a more manageable financial outlook.
    • Protecting both business and personal assets during bankruptcy proceedings and shielding certain assets from liquidation.

Get Help from Our Small-Business Bankruptcy Attorney

Declaring bankruptcy is a challenging and complex process that small-business owners can find overwhelming, but there is help available from Birk Law Firm, in Cape Girardeau, MO.  Kelvin Birk is a small-business owner himself, and is a Certified Public Accountant (CPA) as well as a business and tax law attorney, so he understands all aspects of small-business bankruptcy. When you have the Birk Law Firm on your side, we will get to know you and your business situation personally. Our goal is to find the best way to enable you to emerge stronger in the end.

Call us at 573-332-8585 today for a free consultation to start working toward a brighter financial future.


Attorney Kelvin Birk

Attorney Kelvin Birk

Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]