Is It Ever Smart For Small Business Owners To File Bankruptcy?

Four things to consider and discuss with a bankruptcy law attorney before filing bankruptcy for your small business.

It’s an unfortunate thing to consider, but filing for bankruptcy is a measure of last resort for some entrepreneurs. The good news is that they are not alone. Prominent entrepreneurs throughout history have filed for bankruptcy and reemerged more successful. For instance, did you know that both George Foreman and Henry Ford both filed for bankruptcy only to reemerge and become millionaires. Even American presidents Abraham Lincoln and William McKinley both filed for bankruptcy, went on to become millionaires and became successful.

For many individuals in the business world, though, once the decision is made to file bankruptcy they’re anxious to start the process, stop collections calls and work toward a fresh start. As Nolo.com, a legal industry online resource, explains “As a small business owner you can file for Chapter 7 or Chapter 13 bankruptcy if your debts become unmanageable.  However, which chapter is right for you depends on the structure of your business, how much debt and assets you have, and whether you intend to continue running the business.”

But be careful: There are some situations where holding off on filing for bankruptcy can actually work in your favor. If you are considering filing, consider these four issues and discuss them with a bankruptcy law attorney:


1. Get your finances in order.

It may seem like a no-brainer, but getting your finances in order is a good place to start. Don’t file for bankruptcy until you know the ins and outs of your financial situation and have gone over everything with an attorney. There are plenty of things you can do to jeopardize your claim, including basic slip-ups like losing paperwork and missing deadlines.


2. Review your recent earnings.

If the income you’ve earned recently (the last six months) is too high, you may only be able to file for Chapter 13 bankruptcy, which requires that you pay back a portion of your debts. Also, if business has severely declined, income from six months ago may not accurately reflect your current financial situation. Waiting to file bankruptcy may change how your recent income looks on paper could allow you to file for Chapter 7 bankruptcy, which will discharge more of your debts.


3. Look at your recent spending.

Just as earning too much in recent months will affect your bankruptcy claim, so will having spent too much. If you made any luxury purchases or got a cash advance on your business credit card right before you file for bankruptcy, you may have to pay that money back under the terms of your claim. It would be considered fraud and would be assumed you never intended to pay back the charges or advances. The same rule applies if you gifted or sold any significant property in the last two years. If you gave it away or sold it for less than it was worth, a bankruptcy trustee can reclaim those things and distribute them to your creditors.


4. Finding a solution that works for you.

The key factor with all of these issues is how they apply to your specific situation. Your best bet is to take a step back and get all your finances in order, then sit down with a bankruptcy expert to figure out a plan of action that will get you the best outcome. If you, or someone close to you, are going through a tough time financially, bankruptcy can offer a remedy. As I mentioned previously though, it is very important that you speak with someone regarding your specific situation and come up with a strategy that gives you the best chance of regaining financial prosperity.


Paul Young is a Pennsylvania bankruptcy attorney who has been assisting individuals, entrepreneurs, and business owners over 25 years.


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