Can A Small Business File Bankruptcy?

Yes, several types of bankruptcy are available to a small business.  Big businesses make big news filing bankruptcy.  We have all heard about the airline bankruptcies and the newspapers are full of stories about home lenders filing bankruptcy.  These bankruptcy cases are multi-million dollar affairs; usually filed under Chapter 11 as major corporate reorganizations.  Small businesses can file Chapter 11 too.  However, the cost of Chapter 11 is often in the thousands of dollars and beyond the reach of a mom and pop business.

What can a small business do when financial pressures threaten to shut it down?  It really depends on what form the business operates under.  A corporation can file either a Chapter 11 or a Chapter 7 bankruptcy.  However, the business must be closed once the trustee has liquidated its assets because it will not receive a discharge of unpaid debt.  If a business is owned and operated by an individual or a husband and wife, a Chapter 13 bankruptcy may be a viable option.

A number of limitations apply under §109(e) of the bankruptcy code.  Only a person or a married couple can file Chapter 13 bankruptcy.  Despite this limitation, in some circumstances a Chapter 13 can help in reorganizing a business.  Even if the business was originally operating as a corporation, if there is only one shareholder or two shareholders who are married to each other the corporation could be dissolved.  If the assets and liabilities are assumed by the shareholders, those individuals could file a Chapter 13.  Of course, the individuals must otherwise qualify for a Chapter 13.  Debt limits are adjusted by law every three years and increased April 1, 2007.