The Role of Bankruptcy in Small Business Survival

The Role of Bankruptcy in Small Business Survival
04 - Apr - 2023
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In the complex world of small businesses, bankruptcy often carries a negative connotation, but it’s not always a sign of failure. In fact, it can serve as a vital tool for Wisconsin businesses facing financial hardship. When debt piles up, and bills become too hefty to handle, bankruptcy might offer a lifeline. It allows a business to wipe the slate clean or restructure its debts, providing a fresh start or a more manageable payment plan. This process can alleviate the immense stress of insurmountable debt, offering breathing room and a chance to reset. Misunderstandings about bankruptcy abound, but understanding its role can change the perception of it being a dark cloud to seeing it as a safety net for small businesses.

The Different Faces of Bankruptcy: Chapter 7, 11, and 13 Explained

When a small business is under financial stress, there are different forms of bankruptcy it might consider, mainly Chapter 7, Chapter 11, and Chapter 13. Each one serves a unique purpose.

Chapter 7, often referred to as ‘liquidation bankruptcy,’ involves selling off a business’s assets to pay back debt. This is generally for businesses that can’t continue operating and need a fresh start.

Chapter 11 is a ‘reorganization bankruptcy’ where the business continues to operate while it works out a plan to pay off its debts over time. It’s generally for businesses that still have a functioning business model but are burdened by debt.

Chapter 13, while primarily for individuals, can apply to sole proprietors. It also involves a repayment plan but is tailored to smaller debt amounts.

The Role of Bankruptcy in Preserving Business Assets

When a small business is swimming in debt, it might feel like there’s no option but to let go of everything. Yet, bankruptcy can sometimes serve as an unexpected ally in preserving business assets. Depending on the chapter filed, bankruptcy can create a shield, often referred to as an “automatic stay,” which temporarily stops creditors from seizing assets.

In a Chapter 11 bankruptcy, businesses can continue their operations while developing a repayment plan, allowing them to keep their essential assets. Even in a Chapter 7 bankruptcy, some assets are exempted from being sold to pay creditors, which means a business might still retain some of its assets.

Bankruptcy vs. Debt Consolidation: Which Path is Right for Small Business?

When a small business faces a mountain of debt, both bankruptcy and debt consolidation emerge as possible paths to tackle the problem. Bankruptcy can offer a fresh start by eliminating or reorganizing debts, but it also carries significant impacts on the business’s credit score and public image.On the other hand, debt consolidation involves taking out a new loan to pay off existing debts. It can simplify payments and potentially lower monthly costs. However, it doesn’t reduce the total amount owed, and businesses must ensure they can meet the new payment terms.

Small Business Survival: The Bankruptcy Pathway to Debt Relief

Small businesses face all kinds of challenges, and overwhelming debt can be a crippling hurdle. When the debt becomes unmanageable, bankruptcy can be a lifeline, offering a structured pathway to debt relief and business survival.

In situations where the business cannot pay its debts, Chapter 7 bankruptcy can wipe out most of the debt after the business’s non-exempt assets are sold. If the business can still generate income but needs help managing its debt, Chapter 11 or Chapter 13 bankruptcy allows the business to restructure its debts and create a plan for repayment.

Bankruptcy doesn’t mean the end of a business. Rather, it’s a legal means of finding relief from debt and potentially giving the business a chance to regroup, reset, and survive despite the challenges.

Bankruptcy Doesn’t Mean Failure for Small Businesses

There’s a widespread misconception that bankruptcy equals failure for small businesses. This isn’t necessarily true. Bankruptcy can be a strategic decision made by a business to handle overwhelming debt and set the stage for a future rebound.

When businesses declare bankruptcy, perhaps not closing their doors for good, but rather seeking a legal way to manage their financial troubles. In cases of Chapter 11 and 13 bankruptcies, businesses continue operating while repaying their debts according to a court-approved plan.

Bankruptcy can provide breathing space for businesses under financial stress and help them reset their financial position. So, while it’s not an easy decision to make, declaring bankruptcy can sometimes be the best choice for a business to recover and pave the way for future success. It’s time to dispel the myth – bankruptcy is not synonymous with failure.

The Legal Process:  Bankruptcy as a Small Business Owner

Going through bankruptcy as a small business owner involves a structured legal process. First, the business owner needs to decide which type of bankruptcy to file: Chapter 7, Chapter 11, or Chapter 13, each offering different paths depending on the business’s situation.

For Chapter 7, non-exempt business assets are liquidated to pay off creditors, and most remaining debts are discharged. In Chapter 11 or Chapter 13, the business proposes a plan to repay its debts over a certain period while continuing operations.

The process starts with filing a petition in bankruptcy court. Once filed, an “automatic stay” comes into effect, temporarily stopping most collection actions by creditors. As the bankruptcy proceeds, the court oversees the selling of assets or the implementation of the repayment plan, depending on the type of bankruptcy filed. 

Post-Bankruptcy: Tips for Rebuilding and Sustaining Business


Emerging from bankruptcy can be a challenging yet hopeful time for small businesses. It’s an opportunity to rebuild and sustain business with lessons learned from past financial struggles.

First, it’s important to carefully analyze what led to bankruptcy. This could include issues like overspending, inadequate cash flow, or a weak business model. By identifying these problems, businesses can make necessary changes to avoid repeating past mistakes.

Next, consider creating a solid, realistic business plan. This plan should focus on managing cash flow effectively, controlling costs, and driving sustainable growth.

Finally, try to rebuild the business’s credit. This can be done by making sure all future bills and financial obligations are paid on time.

In addition to analyzing past mistakes, it’s crucial to understand the bankruptcy laws that apply to your situation. The team at Debt Advisors ,particularly at their Kenosha office can provide valuable insights into consumer rights against debt collectors, the Wisconsin Chapter 7 means test, and the impact of COVID-19 on bankruptcy laws. This knowledge will empower you to make informed decisions as you work to rebuild your business.

Emerging from bankruptcy is a chance for a fresh start. With careful planning and responsible financial management, a business can bounce back stronger and more resilient than before.

If you are dealing with bankruptcy, contact us or call us at 866-696-6432 today for a free consultation.

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