What Happens When You File For Bankruptcy?

Most new businesses are faced with this difficult decision regarding whether or not they should file for bankruptcy and, if so, which type of bankruptcy they should use. Between 2021, just over one-half of all new small companies lasted at least one year. The reason these businesses were not chosen to go under is because of a multitude of reasons. Some of these reasons include having too much debt, using credit cards too often, having no sufficient insurance, poor management and oversight of the business, failure to meet sales goals, not obtaining enough venture capital, and having unsecured financing. 

If you think about the most common problems associated with many of these businesses, one comes right up at the top: being in too much debt. A creditor may petition to have a default judgment filed against the debtor which would require the debtor to pay back a substantial amount of money to the creditor. This can create a nightmare situation for the debtor since he may have to pay the entire owed debt even if he can’t; or worse, he might lose his home or other collateral to the creditor. If the debtor doesn’t have enough money available to him, filing for bankruptcy might be the only option he has, but even then it’s probably not a good option because it will damage his credit in the long run and take years to recover from. That is why it is important for businesses to get a CPA to assess their financial situation to find out if they should file and when. 

One reason many small business owners don’t think about filing for bankruptcy is because they believe they do not have enough debt. However, that is simply not true; there are different types of debt and creditors. For example, there is a debt known as unsecured debt which does not require the debtor to provide any collateral, which means that he is not risking his home or other assets in case he cannot pay his debts back. Unsecured debt is usually the smallest type of debt, so if you have a lot of unsecured debt, you should probably consider filing for bankruptcy. 

Another reason that many business owners don’t consider bankruptcy is the fear that doing so will affect their ability to get loans or credit. First, any court decisions relating to the liquidation of assets will be reported to the major credit bureaus; and next, during a liquidation, there will be a review of all court cases regarding the debts of the company, and the results will be reported to them too. Lenders will certainly view those records with a negative eye, and they could decide not to extend credit to your company because of the bankruptcy filing. In addition, if you have outstanding debts that will be discharged during the bankruptcy proceeding, such as tax debts, they will not be discharged during the restructure. 

So the answer to the original question is that yes, small business bankruptcy lawyers can help your business through a liquidation proceeding. However, keep in mind that the goal of a bankruptcy lawyer is not to prevent you from buying another business, but to protect your assets in order to allow you to raise capital and repay debts. In most cases, the discharge of the debts in a chapter 7 bankruptcy proceeding is much less expensive than the payment of collection fees, attorney’s fees, and other costs that would be involved if you were to file a civil suit against the company. You’ll also experience a smoother processing time with this method of debt relief. 

Small business bankruptcy lawyers represent you before the bankruptcy court, and during the course of the process they may be involved in many of the debtor and creditor negotiations. These negotiations are an important part of protecting your assets in the case of liquidation. Of course, even if the creditors agree to some reduction in your debt, the liquidator (the person or business that is responsible for liquidating the assets) still has the authority to sell them to satisfy your creditors’ debts. So it is in your best interest to consult with your lawyer and find out what the best route is for you to take when it comes to filing for bankruptcy protection.