There are over 28 million small businesses in the United States, which account for more than 99% of all companies in the country. Small businesses play a vital role in the US economy, creating jobs, driving innovation, and fueling economic growth.
Despite their importance, small businesses often face significant challenges when operating. They don’t have access to capital and other companies’ resources. About half of small businesses close by their fifth year running, with some filing for bankruptcy.
If you’re one of these businesses filing for bankruptcy, don’t be afraid. You’re not the only one. Think of it as part of a cycle instead of thinking of it as the end. Here’s everything you need to know about bankruptcies.
What is Bankruptcy?
Bankruptcy is a legal process that allows businesses and individuals to discharge their debts. When a business files for bankruptcy, it’s called Chapter 7 bankruptcy. This type of bankruptcy liquidates its assets and uses the proceeds to pay its creditors.
When an individual files for bankruptcy, it’s called Chapter 13 bankruptcy. This type of bankruptcy creates a repayment plan that allows individuals to repay their debts over time.
How Does Bankruptcy Work?
There are two types of bankruptcies: Chapter 7 and Chapter 13 bankruptcies.
Chapter 7 Bankruptcy
A business can file for Chapter 7 bankruptcy if it doesn’t have enough money to pay its debts. In a Chapter 7 bankruptcy, the company sells its assets and uses the proceeds to pay its creditors. This type of bankruptcy is called liquidation bankruptcy because the business liquidates its assets.
Chapter 13 Bankruptcy
Individuals can file for Chapter 13 bankruptcy if they have enough money to pay their debts but don’t want to. In a Chapter 13 bankruptcy, the individual creates a repayment plan that allows them to repay their debts over time. This type of bankruptcy is called a reorganization bankruptcy because individuals reorganize their finances.
In this case, you’ll be applying for Chapter 7 bankruptcy. It’s important to note that not all businesses that use this kind of bankruptcy have nothing left. Most of them do. It’s just that they don’t have the money to pay back their debts. It’s also utilized as a time to regroup and consider options, as you will see later on.
What Happens When You File for Bankruptcy?
Filing for bankruptcy takes time. However, an automatic stay goes into effect when your court filing has been approved. This stay prevents creditors from contacting you or seizing your assets. It also stops lawsuits and wage garnishments. The stay is in effect until your bankruptcy case is over. So this is a good time to assess your current position because creditors aren’t chasing after your throat.
Your bankruptcy case will be assigned to a trustee. The trustee’s job is to oversee your case and make sure you follow the bankruptcy rules. The trustee will also sell your assets and use the proceeds to pay your creditors.
What Happens During Bankruptcy?
You’ll also have to attend a meeting of creditors. This meeting allows your creditors to ask you questions about your finances and bankruptcy. You’ll also have to complete a means test. The means test is used to determine if you qualify for Chapter 7 bankruptcy. If you don’t qualify for Chapter 7 bankruptcy, you may still be able to file for Chapter 13 bankruptcy.
You’ll also have to complete credit counseling before you can file for bankruptcy. Complete credit counseling will help you understand your financial situation and the options available to you.
After you file for bankruptcy, you’ll be required to complete post-filing credit counseling. This credit counseling will help you rebuild your credit after bankruptcy.
What Happens After Bankruptcy?
Once your bankruptcy case is over, your dischargeable debts will be discharged. This means you won’t have to pay them back. However, you will still owe certain debts, such as student loans, child support, and alimony.
You’ll also be able to rebuild your credit after bankruptcy. It may take time, but it can be done. You’ll have to start by rebuilding your credit history. This can be done by getting a secured credit card or a loan from a friend or family member.
What Are the Risks of Filing for Bankruptcy?
Filing for bankruptcy is not a risk-free option. There are some risks associated with filing for bankruptcy.
The most significant risk is that your creditors could seize your assets. Creditors can also file a lawsuit against you. If they win, they could get a judgment against you. A judgment could result in wage garnishment or bank account seizure.
You could also lose your home or car if you file for bankruptcy. In some cases, you may be able to keep your home or car if you’re current on your payments. However, you could still lose them if you can’t afford the payments.
Your credit score will also be affected by bankruptcy. Bankruptcy will stay on your credit report for up to 10 years. This will make it difficult to get approved for new lines of
Filing for bankruptcy can be a scary process, but it’s not the end of the world. You’ll be able to start fresh after you get your discharge. And you can rebuild your credit so you can purchase a car or house in the future. Who knows, you might be able to build a business again one day. Remember, bankruptcies aren’t the end. They are just part of an endless cycle.