Going Out of Business or Bankruptcy

If a business is closing and selling off its inventory, you may automatically think that it is going bankrupt, but that is not always the case.  Both businesses that are simply closing and those that are going bankrupt offer steep discounts when they are selling off assets before closing their doors forever.

Going Out of Business

A business may still have a strong financial standing and decide to go out of business.  The owner may simply be retiring or ready to move on to another business or endeavor.  Assets are sold off, any accounts that may have been opened using receivable financing would need to be paid in full, and the business closes.

Going Bankrupt

Not all businesses that go bankrupt close.

A business may file bankruptcy yet remain open and operating under Chapter 11 bankruptcy protection.  Many businesses take this approach, and it allows them to try to recover their finances and become profitable once again.  This type of bankruptcy filing gives them breathing room, so to speak, so they have a chance to improve their bottom line.  The company must create a repayment plan (usually to pay at least as much as the creditors would have gotten under a Chapter 7 bankruptcy).  This plan must be approved in court by the court and creditors.

However, a business may decide that recovery is not possible and file Chapter 7 bankruptcy.  In that situation, all of the assets are sold off at a discount, creditors get what money remains, and the business closes permanently.

A business may choose to file Chapter 11 bankruptcy in an attempt to recover the business.  Filing Chapter 11 can be a powerful tool to get creditors to negotiate while still maintaining control of the business and trying to make it profitable again.  If it does work, the company can always move to Chapter 7 bankruptcy and liquidate assets and close the business.

What Debts Can’t Be Discharged?

Just because a company files bankruptcy does not mean that all debts will be discharged.  The company will still be responsible for taxes and debts incurred after the bankruptcy was filed.

Is the Business Owners’ Credit Affected?

Small businesses often file bankruptcy.

If the business operates as an LLC (limited liability corporation), the owner’s credit will generally not be affected unless he guaranteed loans for the business with personal items for collateral, including homes, vehicles or retirement accounts.  If the business owner files for business bankruptcy, he will need to pay those accounts or risk losing his personal property.

Those who operate as sole proprietors are not allowed to file a separate business bankruptcy.  Instead, they would have to file personal bankruptcy.

Many small businesses fail within the first few years of operation, and even large companies have filed for Chapter 11 thanks to the recent economic downturn.  While you may not want to start a business with bankruptcy in mind, it is important to develop an exit strategy, both for letting the business end naturally and simply closing or selling it and for the worst case scenario of having to file bankruptcy.