Declaring bankruptcy can offer struggling small businesses a fresh financial start. But while the decision may offer short-term relief, it can also have far-reaching consequences. Read on to learn about the pros and cons of declaring bankruptcy.
Declaring bankruptcy: Pros for small business owners
One of the most immediate benefits of declaring bankruptcy is the court-issued automatic stay. The automatic stay prevents creditors from making debt collection attempts. This can end any threatening phone calls or letters you may be receiving.
It’s also a myth that declaring bankruptcy always leads to the loss of a home or other valuables. Under Chapter 7 bankruptcy, there are protections to prevent the seizure of certain assets.
The protections afforded by bankruptcy law extend to your employment, too. Future employers can’t discriminate against you for declaring bankruptcy. So financial missteps in the past need not impact your future career plans.
Not everything is forgiven
Declaring bankruptcy can discharge or forgive you of many debts that you cannot repay. Bankruptcy doesn’t discharge every type of debt, but it can wipe out things like credit card debt.
Sole proprietors can file personal bankruptcy to wipe out both personal and business debts. Or, you can create a consolidated debt repayment plan under Chapter 13 bankruptcy. This may allow you to continue business operations while making manageable monthly debt payments.
With many or all your debts forgiven, you can immediately begin to rebuild your credit rating. This invaluable benefit can put you on a sound financial footing for the future.
Declaring bankruptcy: Cons for small business owners
The notion of wiping out your debts can be tempting to a struggling business owner. But declaring bankruptcy cannot forgive all your debts. You can’t discharge student debt, back taxes, alimony and other types of debt.
Declaring bankruptcy will decrease your ability to borrow more credit. Many credit card companies will cancel your existing unpaid credit cards.
The bankruptcy will also appear on your credit report for between seven and ten years. This can make it challenging to get a new home or auto loan.
Moreover, not all forms of property are exempt under Chapter 7. You may lose business assets that are seized to repay debts.
The form of your business can also limit the type of bankruptcy you declare and the benefits you receive. Chapter 7 bankruptcy is available to both individuals and companies. But separate legal entities like LLCs or corporations cannot file for Chapter 13 bankruptcy.
Lastly, the process of declaring bankruptcy can, ironically, put you further in the red. Filing fees, attorney consultations and more can add up. This is especially painful when you’re already in a vulnerable financial position.
When should you declare bankruptcy
Nobody ever starts a business with bankruptcy as the end goal. It can be difficult to make this decision—especially when you’ve put so much blood, sweat and tears into your business. We’re not here to tell you the best decision for your business, but we hope this helps you make an informed decision.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.