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Three things business owners should consider before bankruptcy

The decision to file bankruptcy is not always an easy one for California business owners. They worry about how bankruptcy might impact their business and their own current finances. 

While bankruptcy can have many benefits for small businesses, many variables can impact what chapter a business owner should choose. Here are a few questions that all business owners should consider before filing bankruptcy to relieve their debts.

1. Are they personally liable for any business debts?

Many business owners start out investing much of their own money into their business. Even though this is common, it can be dangerous.

If they do not separate their business finances from their personal accounts, then business owners could be personally liable for some of the business debts. Certain business formations, such as a limited liability company (LLC), automatically separate the business from the owner. Therefore, an LLC might protect the owner's personal finances if they file bankruptcy.

The formation of a business—as well as an owner's liability—might impact what chapter a business owner should file.

2. How much debt do they have?

The bankruptcy chapter that businesses choose often depends on the amount of debt they have. If they have substantial debts that jeopardize the business' future, Chapter 7 might be a viable option. This chapter liquidates many of the business assets to relieve the debt.

However, business owners can also consider Chapter 11 or Chapter 13 bankruptcy if they plan to repay the debts over time and reorganize their business finances.

3. What about the future of their business?

Business owners always worry about the future of their business. And even more so in bankruptcy. When considering bankruptcy and the future of their business, owners should consider:

  • How much profit the business is collecting
  • If they have more assets than liabilities
  • How much business debts they accrued

They should also consider how they want their business to operate during bankruptcy. When business owners file Chapter 7 bankruptcy, they often must close down their business. Meanwhile, filing Chapter 11 bankruptcy allows a business to remain open and continue to make payments to relieve their debt. 

There are many more questions to consider

The decision to file bankruptcy is made up of many other decisions business owners must consider. The three listed here are only a few of the most important ones.

All of these decisions impact each other. It is critical to weigh all of these decisions carefully when business owners consider bankruptcy and the future of their company.

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