The Impact of Bankruptcy on Small Business Owners: Myths vs. Reality

Bankruptcy is a word that often sparks fear, especially for small business owners who have poured time, money, and passion into their ventures. The idea of losing everything or permanently damaging financial credibility can be overwhelming. However, many of the common beliefs surrounding bankruptcy for small business owners are based on myths rather than reality.

If you are struggling with overwhelming debt, understanding the truth about bankruptcy can help you make informed decisions about your financial future. Let’s explore some of the most common misconceptions and what really happens when a small business files for bankruptcy.

Myth #1: Filing for Bankruptcy Means You Lose Everything

Reality: Bankruptcy Can Provide a Path to Financial Recovery

Many business owners assume that filing for bankruptcy means their business will be completely shut down, assets will be seized, and they will be left with nothing. In reality, bankruptcy is designed to offer protection and restructure debt in a way that allows you to regain control of your financial situation.

• Chapter 7 Bankruptcy: If a business has no path forward, Chapter 7 may be an option. This involves liquidating assets to pay creditors and closing the business.
• Chapter 11 Bankruptcy: This option allows businesses to reorganize, keep operating, and create a manageable repayment plan. Many well-known companies have used Chapter 11 to recover and thrive. Learn more about Chapter 11 bankruptcy.
• Chapter 13 Bankruptcy: While typically for individuals, sole proprietors may use Chapter 13 to reorganize debts and continue operating.

Each situation is different, but bankruptcy does not automatically mean the end of your business.

Myth #2: Bankruptcy Permanently Destroys Your Credit

Reality: Bankruptcy Can Help You Rebuild Credit Over Time

Many small business owners guaranty the debts of their business and may end up filing bankruptcy personally as well. If the business files bankruptcy, the business’ filing does not show up on the owners individual credit report. 

While bankruptcy does affect your credit, it does not ruin it forever. Many small business owners who file for bankruptcy can start rebuilding their credit shortly after their case is resolved. Here’s how:

• Eliminating or restructuring debt can improve your debt-to-income ratio.
• Making on-time payments after bankruptcy helps boost credit scores.
• Many lenders offer secured credit options to help rebuild financial standing.

Most business owners who file for bankruptcy find that they are able to access credit and financing again within a few years.

Myth #3: Bankruptcy Means You Are Financially Irresponsible

Reality: Bankruptcy Is Often the Result of Unforeseen Circumstances

Filing for bankruptcy does not mean you failed or mismanaged your finances. Many small business owners face financial hardship due to reasons beyond their control, such as economic downturns, supply chain disruptions, unexpected lawsuits or liabilities, medical emergencies, rising interest rates, and more.

Bankruptcy is a tool that helps businesses and individuals recover from financial hardships, not a reflection of personal or professional failure. 

Myth #4: You Will Never Be Able to Own a Business Again

Reality: Bankruptcy Does Not Prevent You from Starting Over

Another common misconception is that business owners who file for bankruptcy will never be able to start another business. Bankruptcy does not bar you from starting a new business–many entrepreneurs have filed for bankruptcy, learned from the experience, and gone on to create successful ventures.

Lenders and investors often consider factors beyond just a past bankruptcy, such as current financial health, the value of assets, and business plans.

If your current business is struggling, bankruptcy may be a way to restructure or close your business while protecting your ability to build something new in the future.

Biggs Law Firm Can Help You Understand Your Options

Bankruptcy is not a one-size-fits-all solution, and it is important to evaluate your specific circumstances before making a decision. If you are a small business owner facing financial difficulties, exploring options like Chapter 11 bankruptcy could be the key to a fresh start.

At Biggs Law Firm, PLLC, we understand the challenges small business owners face. If you have questions about how bankruptcy could impact you or your business, contact us to discuss your options. Filing for bankruptcy is not the end—it can be the beginning of your new story!