Apr 17, 2020

What You Need to Know About Filing Bankruptcy for Your Small Business

Businesses fail for many reasons: there wasn’t enough demand in the market, consumer preferences changed, or maybe the business had too many inefficiencies. However, sometimes—as with the coronavirus pandemic—businesses fail because of inexplicable and uncontrollable factors.

In the wake of COVID-19, many businesses are left contemplating whether to file for bankruptcy. In fact, the newly-revived XFL recently filed for Chapter 11 bankruptcy because of the economic hardships and uncertainties surrounding the coronavirus. 

Whether it’s from mounting debt, poor management, or a global pandemic. If you’re thinking about bankruptcy, there are a lot of considerations. Keep reading to better understand the nuances of filing for bankruptcy and what it would mean for your personal and professional finances.  

Understanding Business Bankruptcy

If a business is floundering in debt and unable to pay its creditors. It can reach out for help through a bankruptcy filing. Depending on the type of bankruptcy. The courts will review your finances and help you create a plan to pay your creditors and eliminate the debt. Bankruptcy is a process that alerts your creditors that you are struggling financially but working to pay them back. 

Declaring bankruptcy does not absolve you of your debts and financial obligations. It is not a “get out of debt free” card. Often, the assets of the company like delivery vehicles, mortgage equity, and equipment are sold (liquidated) and used to reduce the debt.

Because you’re liquidating your business assets, bankruptcy typically means that your company will need to shut down.

Different Types of Bankruptcy

One of the first steps to filing bankruptcy is to determine the right path forward for your business. There are multiple options for bankruptcy filing that are made for different business sizes and types.

These chapter options also depend on the future plans of your company.

Before you can file for bankruptcy, you need to know which options you are eligible for and how you want to move your business forward. This means either liquidating and closing entirely through Chapter 7. Another options is restructuring and repaying your debt while continuing to operate through Chapter 11 or Chapter 13. 

Take Steps to Prepare for Bankruptcy

If you are considering filing for bankruptcy, you can take a few steps to prepare for it. These steps may also help reduce your debt and even eliminate your need to declare at all.

After these steps, you may feel like your debt is more manageable—or you may have a clearer picture of how you want to declare bankruptcy and change your business.  

Look for Other Options Before You Declare

Bankruptcy should never be the first choice when your business is failing. Consider other ways to raise funds for your company or pay off your debts. 

For example, a short term loan can offer a business up to $500,000 on a 3-year term. This financing option gives you more immediate flexibility and could help you consolidate your debt into one source (with a competitive interest rate). While keeping your business in operation. 

You started your business to strike out on your own and follow your passion. Sometimes, that passion isn’t enough, and you’re left looking for a way out. If you’ve explored all your other options and have decided to file for bankruptcy, just make sure you know that means for you and your small business.



The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.


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