What is Bankruptcy?

Bankruptcy for Small Businesses - SmallBusinessWarrior.net

What is Bankruptcy?

Nearly 100,000 establishments that temporarily shut down due to the pandemic are now out of business. According to Yelp.com’s Local Economic Impact Report, as of August 31st 163,735 total U.S. businesses on Yelp have closed since the beginning of the pandemic (observed as March 1). This was a 23% increase since July 10th. In the wake of COVID-19 cases increasing and local restrictions continuing to change in many states, both permanent and temporary closures have risen across the nation, with 60% of those closed businesses (97,966 businesses) not reopening and permanently closed.

As a small business owner during these tumultuous times, you may be faced with considering bankruptcy to either restructure your debt, reorganize your business, or cease business operations. Below is information to various types of bankruptcies you can file and the pros and cons for filing bankruptcy.

Bankruptcy is a court proceeding that involves examining your assets and debts. It allows debtors to restructure and/or discharge their debt to obtain a financial “fresh start.” The court decides if you have the means to pay all, some or none of your debt. Filing bankruptcy is a serious step with long-term credit and financial consequences, so it should be used as a last resort. Companies can file for either Chapter 7, Chapter 11, or Chapter 13 bankruptcy if they’re unable to pay their debts.

Bankruptcy can be voluntary: Filing a petition for bankruptcy relief with the bankruptcy court

Bankruptcy can be involuntary: If you are unable to pay your creditors, they may be able to force you into bankruptcy


– Provides debtor an automatic stay which halts actions by creditors

– Protects creditors’ interest (collateral)

– Reorganizes debt to maximize value to creditors (repayment)


– Fewer transaction costs

– More private

– Quicker to implement

– Less disruptive to operations


– Disruptive to operations

– Long time to implement

– Expensive

– Publicity

– Loss of management control


– Tax returns

– Balance sheets 

– Cash flow statements

– Statement of operations


– Automatic stay

– Discharge of debts

– Negotiate with creditors


– Loss of control (court governed process)

– Financial statements and records of business will be scrutinized by the court (could become problematic if books and records are not maintained or employees are paid “off the books”)

– Bankruptcies stay on your credit score for seven to ten years, depending on the filing type

– Lowers your credit score immediately; the drop can be between 130 and 200 points

– May be difficult to access another small business loan


– Close the business or keep it operating?

– Provided any personal guarantees on business debt?

– Condition of company’s business records?


CHAPTER 7 (Liquidation)

– For individuals and companies

– Ideal for struggling businesses that are looking for a simple way to close down their business

    * Individuals may need to file for personal bankruptcy if they co-signed loans, commercial leases, are sole proprietors, or personally responsible for some of the business debts of the company

– Partnerships: If the liquidation of the business’ assets does not fully pay all the debts of the partnership, general partners can be sued and their personal assets and properties may be used to pay creditors

– Corporations and LLCs: If business finances are misused, creditors can sue to make the individual owners personally liable for the debt of the company

CHAPTER 11 (Reorganization)

– For companies (and some individuals); includes small business reorganizations

– Have approximately four months to come up with a reorganization plan, but in some cases, this timeframe may be extended up to 18 months

– Company reorganizes to reduce its debts or repay creditors over time


– Small businesses are defined as entities with less than $2.7 million in debts (raised to $7.5 million until March 2021 pursuant to the CARES ACT

– Less expensive and faster for small businesses

– File a restructuring plan in 90 days

– Extends the business time to pay off creditors (3 to 5 years)

CHAPTER 13 (Individuals)

– Reorganization bankruptcy for individuals

– It can be used for sole proprietorships since sole proprietorships are indistinguishable from their owners 

– Used for small businesses when a reorganization is the goal instead of liquidation

– Eliminates qualified debt through a repayment plan over a three- or five-year period


Wishing the best for you and your business’ future.

Dream Big,

La Shawn, Small Business Warrior

What is Bankruptcy?

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