Can A Small Business File Bankruptcy?

06 Nov 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. Individuals can receive a discharge of debt so once the bankruptcy is completed, they can get a fresh start.

A number of limitations apply under 109(e) of the bankruptcy code which covers who may be a debtor under the various bankruptcy chapters. 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 that cap the amount of debt that can be owed by a Chapter 13 debtor are adjusted by law every three years and were increased April 1, 2007.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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