Small Business Bankruptcies: The Basics

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chapter 11 bankruptcyWhen a small business is having trouble managing its finances, filing for Chapter 11 bankruptcy protection may be the best way to handle the situation. Even though the media tends to portray Chapter 11 bankruptcies as failures for the big corporations that file them, these bankruptcy claims can actually be beneficial to small businesses in certain circumstances.

Here’s a quick look at the typical bankruptcy proceedings under Chapter 11 for small businesses:
  • First things first: The two main types of personal bankruptcy claims are Chapter 7 bankruptcy and Chapter 13 bankruptcy. These make up around 97% of all bankruptcy cases in the U.S. in an average year; business bankruptcies filed under Chapter 11 only count for around three percent of all claims. Businesses can file Chapter 13 bankruptcies — but only in specific situations — which we’ll discuss later.

  • Small businesses often avoid filing for bankruptcy under Chapter 11 because it can be very risky. Large corporations tend to benefit from Chapter 11 the most because it involves a restructuring of debts, and not necessarily liquidation of debts.

  • Restructuring debts is a big advantage for individuals and businesses alike when it comes to bankruptcy claims. It may not seem like an advantage; after all, your credit report will be feeling the effects of a bankruptcy claim for at least a decade, and you’ll still have to pay back all the money. Nevertheless, Chapter 11 and Chapter 13 bankruptcy claims are beneficial because they allow for the petitioner to keep more of his or her assets. For business owners, this means you can continue operating your business.

  • When a small business files for Chapter 11 bankruptcy, there are some additional requirements that big corporations won’t necessarily need to worry about. These requirements typically call for more detailed reporting and more oversight from government officials, and the intention here is to protect the business as much as possible.

  • For small businesses that don’t qualify for Chapter 11 bankruptcy — or just want to avoid it — they may be able to file for bankruptcy under Chapter 13. This is only allowed if the business in question is owned and operated by a single individual; small businesses that operate in partnerships are not eligible. The small business owner must also show that the business owes no more than $383,175 in unsecured debts or $1,149,525 in secured debts.

If you are a small business owner and you’re struggling with finances, it’s important to know that there are ways to find help.