A Bankruptcy Guide for Business Owners

Whether it’s because a business overextended itself or had the right product or service at the wrong time, bankruptcies can happen to any-sized company at any time.

For a small business owner facing the prospect of bankruptcy, knowing your options ahead of time will make the process that much less painful and make a recovery more obtainable.

“The best thing to do if you are considering bankruptcy is to contact a reputable attorney that specializes in business bankruptcy and reorganization, and get an idea of what handling your business bankruptcy might cost,” said LegalZoom’s general counsel Chas Rampenthal. “Don’t be afraid to ask for a flat fee or an estimate. You might not get a flat fee, but any lawyer that will not at least give you a ballpark range of what you can expect does not deserve your business.”

The prices for different bankruptcy options vary, as does what makes sense for which type of business. With that in mind, here’s a look at bankruptcy options for business owners.

Liquidation or Chapter 7 Bankruptcy

Ideal for sole proprietorships and small businesses, according to Rampenthal, this form of bankruptcy is often used when there is no hope of reorganizing the business. With a Chapter 7 bankruptcy a trustee will be named to sell all of the assets of the business, including its client list, and all proceeds will go toward paying any outstanding debts. Any unpaid debts after the liquidation sale are forgiven and the business no longer exists.

According to Rampenthal, the cost for a Chapter 7 bankruptcy typically starts out at $2,000 but can cost more than $5,000 if there are a lot of creditors involved that want to contest the liquidation.

While a Chapter 7 Bankruptcy usually means the end of the business, Mazyar Hedayat, president of M. Hedayat & Associates and Rocket Lawyer On Call Attorney, says it can be used to give the business owner another chance.

“If nobody buys the assets once they are put up for sale and the trustee is not interested, in some circumstances you can buy your own assets back,” says Hedayat.  He notes for most small businesses a Chapter 7 bankruptcy is the primary option, since other options can cost a lot more.

Reorganization or Chapter 11 Bankruptcy

Typically used by larger companies that don’t want to abandon ship but want time to try and reorganize the business, a Chapter 11 bankruptcy is best suited for business owners who are confident the business can recover and flourish under a reorganization plan.

“An entrepreneur should realize that if he or she uses this method, then the company will usually operate under increased scrutiny from a court-appointed trustee for a period of time,” says Rampenthal, noting the price tag for this type of bankruptcy varies. It isn’t uncommon for it to cost anywhere from $10,000 to $25,000. For larger companies, Rampenthal says, the cost can skyrocket to $50,000 and up.

“In exchange for the higher fee you get a much bigger canvas than Chapter 7,” adds Hedayat. “With Chapter 11 bankruptcy the waiting period is four months, which is a huge amount of time to make a big plan.”

Repayment or Chapter 13 Bankruptcy

Generally used by personal consumers, with this type of bankruptcy the business owner is required to file a repayment plan with the bankruptcy court laying out how he or she will pay back all the debts.

“If you did not form a specific business entity and you are the only owner of the business, you are probably a sole proprietor,” says Rampenthal. “Since this is not a separate legal entity you are personally responsible for business debts.” Filing for business bankruptcy in this instance is really just a personal bankruptcy.

“If the sole proprietor has personal assets intertwined with company assets, this form of bankruptcy can help you avoid losing personal assets like a home,” says Rampenthal. According to Hedayat, a Chapter 13 bankruptcy can cost around $4,500.