What Can the Owner of a Failing Small Business Do to Save the Business?


Small businesses run into trouble for all kinds of reasons, some of them the fault of the owners, but many of them beyond any owner’s control. Not every business succeeds. In fact, most start-up businesses do not. When a small business is failing, bankruptcy is an option. However, there are several different kinds of bankruptcy. Some can help keep the business going, some won’t.

Small-business owners should only consider declaring bankruptcy if their personal assets are at risk. To avoid that risk, small business owners should organize as a corporation, a limited liability corporation, or some other limited-liability entity. This may protect their personal assets from creditors with claims against their businesses.

What Are a Small-Business Owner’s Options in Bankruptcy?

The U.S. bankruptcy code has three options for the owners of small businesses. They are:

  • Chapter 11
  • Chapter 13
  • Chapter 7

Under Chapter 11, a business may restructure its debt. This generally involves renegotiating debt and other steps to put off payments that the business cannot meet at the time. This is often called reorganization.

Chapter 11 generally is useful only for larger operations or publicly traded corporations. It is time-consuming and expensive. It is useful to creditors only if the business is likely to emerge from bankruptcy as a going concern and creditors will get their money back because the business succeeds.

For a smaller business, such as a sole proprietorship, Chapter 13 also allows a business owner to repay a reduced portion of the business’s debt under a court-supervised repayment plan and keep the business going. The business must generate enough income to make repayment of some portion of the debt feasible to qualify for a small business filing under Chapter 13.

Finally, there is Chapter 7, which is a liquidation of assets and discharge or remaining eligible debt that spells the end for the business. If the business has no substantial assets and no feasible way to repay debts, Chapter 7 generally is the way to go. In fact, under such circumstances, the court might make the choice for you and reject an attempt at a Chapter 13 filing.

Under Chapter 7, the court appoints a trustee who takes possession of the business’s assets, if any, liquidates the assets, and distributes the proceeds to the creditors. The debtor, who must be a sole proprietor, is given discharge of any debt not repaid under the liquidation. The sole proprietor is debt-free and the business is no more.

If You Are a Small-Business Owner Considering Bankruptcy in Salt Lake City, Call Bankruptcy Attorney Jory L. Trease of JLT Law to Discuss Your Options

If you are a small-business owner facing financial difficulties and are considering filing for bankruptcy, you need to understand how the bankruptcy laws can work for you. Bankruptcy can help you keep your business going. Take advantage of a free case evaluation. Contact me at (801) 896-9444 or through my online contact form.