What to Do if Your Small Business Goes into Bankruptcy

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The sad truth is that most businesses will eventually fail. The market is only large enough to accommodate a certain number of top companies at one time, and a lot of contenders get eliminated before they even reach the top tier. That being said, bankruptcy is not the end of the world. Many successful people and companies have come back from this setback and emerged better on the other side. Although this short article cannot tell you everything you need to know, here is a shortlist of things to do if your small business goes into bankruptcy.

Determine What Kind Of Bankruptcy You Will File

Once you realize that your business has become insolvent, the bankruptcy process can be said to have begun. It is too late to prevent the bankruptcy itself but it is not too late to manage the situation intelligently. The first thing to do is determine which kind of bankruptcy you will file. Your options are:

  • Chapter 7 Bankruptcy: All business assets are liquidated. The proceeds are then divided among the business’ debt holders. This is the best option for a company that has no viable future.
  • Chapter 11 Bankruptcy: The business and its debtors make a plan and a contract, with the goal being to repay the debt holders as soon as possible. This is the most complex option, but it offers an opportunity for a struggling business to turn things around.
  • Chapter 13 Bankruptcy: A payment plan is made to repay all debt holders, with the income and expenses of the owner taken into account. This one is only used for sole proprietorships and private individuals.

Consider Some Professional Help

The legal system can be an incredibly tricky thing. Unfortunately, this fact seems to be true pretty much everywhere, and that is why there are whole companies that make their money by helping people navigate the system. One example would be the various debt relief service companies that offer debt consolidation in Calgary Alberta or your particular locale that can be very helpful to those who are unfamiliar with the process of filing bankruptcy. Obviously, if you already know a good lawyer, that is a good place to start. Of course, your preferred attorney may not be knowledgeable about this part of the law. However, they can probably refer you to someone who is qualified, and that’s always better than a shot in the dark. We leave it up to you to determine which people and services will work best for you.

Ask About Chapter 11, Sub-Chapter 5

This is a little-known fourth option that you might find to be helpful. Chapter 13 is probably the most forgiving and easy route, but it is only practical for sole proprietorships. For a partnership or a small corporation, it can cause far too many problems. Thus, chapter 11 bankruptcy is often the best choice for such groups, even though it gives extra rights to your debt-holders and involves significant legal fees. However, if your business qualifies, you might be able to restructure under chapter 11, sub-chapter 5. This will give you more lenient terms that are similar to those that govern chapter 13 bankruptcies. It wouldn’t hurt to ask your chosen professional to see if you qualify for this kind of thing.

Examine The Situation And Look For Lessons

If you find yourself in a situation where you have to declare bankruptcy, you have probably made a big mistake somewhere. After you have dealt with the practical needs, it is important to reflect on the causes of small business bankruptcy. Some of the most common causes include:

  • Lack of proper planning
  • Lack of financing resources
  • Lack of business experience
  • Lack of personal discipline on the part of the owner(s)

Only you can pinpoint the exact cause, but you might be able to find an in-depth study on small business bankruptcy to be helpful.


Needless to say, declaring bankruptcy is not a decision to be made lightly. If you don’t know the system well enough to make the right moves, it can be a decision that brings personal ruin. However, when used skillfully, it can also be a tool that gives wayward businesses a chance to right their course.

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