The Fact and the Fiction of Business Bankruptcy

No one really wants to discuss it, but it’s a topic that more small businesses need to know about in this current uncertain economy. It can be an important move that can actually help save your financial future if you, or your business, is deep in debt. Yes, we’re talking about bankruptcy. There is so much information and misinformation out there about the touchy topic that it’s easy to be confused about what really happens when you file for bankruptcy, especially when it’s for your business. Below are some common misconceptions and some solid facts about filing for bankruptcy.

Fact & Fiction of Business Bankruptcy
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FACT: You will lose your business. Most likely, if you file for bankruptcy, you will have to close your business, especially if you file for Chapter 7 (which is typically use for personal bankruptcy, but may be the better option for small business owners). For some, this isn’t a major concern since they were planning on closing the business anyway, but if you had wanted to hang onto the business, be aware that the court may want to shut it down, at least temporarily. Some service business owners without a lot of assets may be able to keep their businesses open. If you want to continue operating your business and you have valuable business assets, you may not want to file for Chapter 7, but reorganize your business and file for Chapter 13 instead (or consider options other than filing for bankruptcy).

FICTION: You have to be completely broke to file for bankruptcy. While most people believe that a person or a business has to be completely without liquid assets in order to file Chapter 7 or 13, this is not true. If you are unable to pay bills as they come due, then you qualify to file for bankruptcy. It’s as simple as that.

In fact, it is preferable for a debtor to file for bankruptcy before they are flat broke, as waiting until they have nothing left could end up making them a burden on the government, with nothing left to live on. Congress even permits some debtors to keep a certain amount of property even after filing for bankruptcy.

Business Bankruptcy
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FACT: Some types of debt are not covered by declaring bankruptcy. Many believe that a bankruptcy wipes the slate completely clean—this is not true. The following types of debt are not covered in Chapter 7 filing—which means you will still owe on these debts after the case is over:

  • Child support and alimony (current and back-owed)
  • Court-imposed fees, fines, and penalties
  • Certain tax debts
  • Loans you borrowed against your pension plan
  • Student loans
  • Debts arising from fraudulent activity
  • Debts resulting from injury or death due to a DUI

However, if you file for a Chapter 13 instead, some of these debts—like back alimony, court fees, loan debts from borrowing against retirement plans—can be discharged as part of the case.

FICTION: You can pick and choose which creditors are included into the bankruptcy filing. All your creditors have to be treated equally, and you are not able to pick which creditors you want to pay back and which ones you don’t. Do not do this, as the court will consider it fraud, and you may lose this discharge of debts gained in the filing.

FACT: Creditors will stop calling. If you’re being harassed by creditors, you can expect the phone to suddenly become silent. Federal law requires all creditors to cease collection attempts once you’ve filed.

FICTION: Filing for bankruptcy will make it impossible to own your business or property again. Given the current economic climate, many small businesses (and many large corporations) are struggling. Bankruptcy is for financial mistakes, overestimation or underestimation of profit or expenses, and simple bad luck. Filing for bankruptcy helps businesses get out from under insurmountable debt—and can actually help you protect personal assets (in the case of filing for Chapter 7 or Chapter 13). Many bankruptcy filers have gone on to start another business; so while there is a social stigma attached to filing, it’s lessened in the tough economy and can help you in the long run.

If your business is struggling and the debt is overwhelming, bankruptcy may be a viable option to help protect your personal assets. This list shows that there are a lot of misconceptions about bankruptcy—so be sure to do your homework before filing.

About the Author
Dave Landry is an associate business and finance writer for  agencies dedicated to helping people with their financial difficulties. He has been writing about debt relief and bankruptcy-related issues for years for several noted web publications.

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