If your business is in trouble, you may be considering filing bankruptcy and you are wondering what to do. This article discusses the steps involved in the business bankruptcy process, and how to make that process easier less painful. 

Filing for bankruptcy is a tough decision for a business. The bankruptcy affects the business, the owners, the employees, and all of their families, for many years. There may be ways to avoid filing that business bankruptcy; bankruptcy should always be the last resort.

 

Step 1: Getting an Attorney

First, you will need a bankruptcy attorney to help you through the process. While some individuals and businesses file by themselves, in most cases it's necessary to have an attorney help you through the process. There are several websites that will help you find a bankruptcy attorney in your state. You will need to file in the state where your business is registered. Be sure to look for an attorney who is familiar with the details of the process of filing business (rather than personal) bankruptcy. 

Step 2: Which Bankruptcy Type? 

When you meet with your attorney, bring all your financial records, so you can discuss your financial situation. Your first decision will be which type of bankruptcy to file. The three types of bankruptcy for businesses are: 

Chapter 7. Chapter 7 bankruptcy is a liquidation. That is, you will be closing the business, liquidating (selling off) all business assets, and using the proceeds to pay creditors. A bankruptcy trustee is appointed by the court to oversee the process of liquidating assets and paying off creditors.

or

Chapter 11.Chapter 11 bankruptcy is a reorganization process. In this case, the company continues to function, and the bankruptcy trustee functions as an overseer, managing the company to bring it out of its financial situation. 

Chapter 13. A small business functioning as a sole proprietorship may be able to file Chapter 13 bankruptcy, depending on the amount and kind of debt. 

Step 3: Completing forms and providing information

After you decide on the type of bankruptcy, you will begin to complete the required form. You can see the bankruptcy forms on the U.S. Courts website.  

You will need to give your attorney all of your business financial records, including income statements, asset records, and prior year tax returns, for this process. 

Step 4: Relief from Creditors 

When the bankruptcy paperwork has been filed with the court, all creditors will be notified and you will be free from harassment by those creditors. This process is called "discharge of debt." It's important to remember that not all debts can be wiped out by a Chapter 7 bankruptcy; some may still remain (tax debts, for example), and may still be the responsibility of responsible parties in the business. 

Step 5: Asset listing and sales (Chapter 7)  

If you are filing Chapter 7 liquidation, you will be required to surrender all of your business assets, unless there are assets you are allowed to keep (these are termed to be "exempt") from the bankruptcy process. 

Then the trustee will sell all the assets and distribute the proceeds to creditors, in a specific order. 

OR

Step 5: Reorganization Plan (Chapter 11)

At this point, the bankruptcy process is in full swing. The trustee will be in charge of your company's operations, authorizing payments and working with you to continue to manage the company. 

  If you are in Chapter 13 bankruptcy. 

Step 6: End of Bankruptcy

For Chapter 7 bankruptcy, the process ends finally with a court decree.  A case can be re-opened if additional assets are identified that must be dealt with.

For Chapter 11 bankruptcy, a court decree is issued when the case has been "fully administered." 

How to Make the Bankruptcy Process More Painless

• Understand the purpose of bankruptcy. It's to give a debtor (including a business debtor) a fresh start, by discharging the debts of the individual or business and keeping creditors from attempting to collect. It's not punishment or criticism. 
• Find an attorney. Business bankruptcy is not a DIY venture.
• Cooperate fully with the attorney. Especially don't try to hide assets in the hope that they won't be discovered. They probably will be, and then the process will go on longer and be more costly. 
• Know when to "fold 'em." You can certainly get multiple opinions, but at some point, you may have to accept the fact that you must end your business, or let someone else run it. 

You can come back from business bankruptcy and live to run another business again. 

For more information, see the U.S. Bankruptcy Court on:

Chapter 7 bankruptcy

Chapter 11 bankruptcy, and

Chapter 13 bankruptcy. 

These are general processes, and include both personal and business bankruptcy. 

Disclaimer: The information in this article and on this site and in newsletters are intended to be general in nature, and not tax or legal advice. Each business situation is different, and taxes and laws are continually changing. Before you make any decisions affecting your business, consult with both your tax and legal advisors.