Ask a Business Expert

A: Bankruptcy, in actuality, is a far cry from the ugly monster most people fear it to be. For most people, bankruptcy, with its attendant opportunity to wipe out (or seriously reduce) most debts, is often a blessing.

Should you feel bad for the creditors? Sure, but most of them will be just fine. Too often, the biggest chunk of debt a small business has is owed to credit cards, and it's difficult to feel too sorry for credit card companies. They charge exorbitant interest rates and often encourage people who are already in trouble to go deeper into debt. In any case, bankruptcy is simply a risk of doing business in a capitalistic society. Even the Bible says, "At the end of every seven years you are to cancel the debts of those who owe you money. This is how it is done. Everyone who has lent money to his neighbor is to cancel the debt: he must not try to collect the money: the Lord himself has declared the debt canceled." (Deuteronomy 15:1–2.)

There are basically three types of bankruptcies a business can file:

Chapter 7: Often called a "liquidation," this type of bankruptcy lets you completely wipe out all unsecured debts like credit card debts, lines of credit, unsecured loans, etc. The downside is, you will probably have to close your doors and allow the bankruptcy trustee to sell your business assets to pay back your creditors. One of my books, Ask a Lawyer: Debt and Bankruptcy, explains this in more detail. (Note: Congress and the new President are on the verge of severely limiting Chapter 7 protection.)

Chapter 13: This type of bankruptcy is a reorganization, which allows you to keep the business open and repay your creditors a portion of what you owe over a three to five year period. It might be 10 cents on the dollar or substantially more, depending upon the circumstances. A corporation cannot file a Chapter 13; only individuals, sole proprietorships and partnerships can.

Chapter 11: This is also a reorganization bankruptcy, for corporations, and individuals whose debts contain a lot of zeros (actress Kim Basinger and her corporation filed Chapter 11). Like a Chapter 13, this is a bankruptcy that allows you to keep your business open, repay your debts, and get back on your feet financially.

Although a bankruptcy will certainly negatively affect your credit for a few years, many people and businesses have pretty good credit about three years after a bankruptcy.