Bankruptcy should always be the last resort for a business. Before filing for bankruptcy, consider these alternatives. Decide whether or not the business can be turned around before making your determination, because some of the options will dissolve the business completely. If the current situation is difficult, but the future looks bright, try to save the business. If not, it may be time to cut your losses and call it a day.
Working Out Debt Solutions Out of Court
Often, small businesses are able to negotiate a settlement with their creditors without having to go to bankruptcy court. This is a cheaper, easier solution for both the small business and the creditors. Sometimes these agreements allow the business to make smaller payments, reduce the total amount they owe or delay payments for a period of time. The business can often get a fair settlement by working directly with their creditors, especially if the business can show that profits will soon turn the situation around.
Assignment for Benefit of Creditors
This is also known as liquidation. With this option, all of the assets of the business are sold to pay off the creditors. It is only done when there is no hope or intention of salvaging the business. State law governs how this process works, but it is not handled under bankruptcy courts or laws. If there is money left over after the assets are sold and creditors are fully paid, the rest of the money belongs to the owner of the small business. Often, this solution is cheaper than filing for bankruptcy, but not always. A qualified attorney can discuss your options and the best route to take.
When All Else Fails
Even if you try one of these solutions and it doesn’t work, bankruptcy is still an alternative. One way to limit your losses when you own and operate a small business is by incorporation. Though you can still lose all the money you invest in the small business, incorporation can protect your private assets if the business ends up in more debt than the assets of the business are worth. However, the time to consider incorporation is before the business is in financial difficulty, not afterwards. Small businesses can file for Chapter 7 bankruptcy, in which the debts are erased and nothing more is owed, or Chapter 11 bankruptcy, in which some or most of the debt is repaid through the courts. Businesses must meet certain federal regulations in order to qualify for either type of bankruptcy. A qualified attorney can help you make the determination and walk you through the necessary steps.