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Business Bankruptcy is There No End in Sight?

In 2008, business bankruptcy filings increased nearly 50-percent over the previous year. According to, more than 18,000 businesses filed for bankruptcy in the first four months alone. Current economics and rising fuel prices have sent numerous business owners over the financial edge.

In order to file business bankruptcy, the owner must file a petition in federal bankruptcy court. There are four chapters which govern business bankruptcies: Chapter 7, 11, 12 and 13. Chapter 7 requires total liquidation of non-exempt assets. Chapter 11 is reserved for corporations and partnerships who wish to reorganize their company. Chapter 12 offers reorganization and is exclusive to farmers. Chapter 13 is a repayment plan available only to individuals and sole proprietors

It is important to realize that filing bankruptcy does not guarantee debts will be discharged or bankruptcy will be granted. While every U.S. citizen and business owner has the right to file for bankruptcy, there is no law stating bankruptcy discharge or reorganization is guaranteed. Specific protocol must be followed and certain requirements must be met.

When a debtor files a business bankruptcy petition, an "automatic stay" goes into effect. This prevents creditors from moving forward with collection action. The debtor must undergo credit counseling through an approved agency, attend a creditor meeting, and present his proposed repayment plan to a bankruptcy judge.

Corporations, Limited Liability Corporations (LLC) and partnerships are required to file for reorganization. Individuals operating their business as a sole proprietor may qualify to file Chapter 7 and obtain a discharge. However, they must be able to pass the 'means test'; a tool used to determine median income levels.

Filing business bankruptcy is a complex process which should be handled by a qualified bankruptcy attorney. If a debtor chooses to file bankruptcy on their own, they could potentially be denied discharge. Failure to comply, misrepresentations to the court, and lack of accounting practices, can result in losing protection of bankruptcy laws or cause the debtor to be criminally prosecuted.

It's never an easy task for a business owner filing bankruptcy and it should be considered only after all other options have been exhausted. Prior to making a final decision, take time to research bankruptcy alternatives and obtain financial or legal counsel.