J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Bankruptcy

Bankruptcy, the “b” word, is a last resort for businesses on the ropes that cannot resolve things with their creditors. That was the action that American Airlines took in 2010 and Eastman Kodak took in 2012, and many small businesses have to do the same. Bankruptcy is a legal process that can enable a company to stay in business (“reorganization” where a plan is used to provide partial satisfaction to creditors so the business can emerge after the process with a fresh start) or go out of business in an orderly fashion (“liquidation” where assets are sold and the proceeds used to pay off creditors to the extent possible).

Which Form of Bankruptcy to Use

Your choices for bankruptcy protection depend on how your business is organized (entity type) and whether you want to stay in business if possible.

• Sole proprietors. Owners are treated like other individuals. They can get a fresh start under Chapter 7 of the bankruptcy law, but most are forced to use a payment plan under Chapter 13.
• Family farmers. Farmers can use a simplified reorganization plan under Chapter 12 of the bankruptcy law if debts fall within a certain limit.
• Other business entities. The entities can be liquidated with proceeds distributed to creditors under Chapter 7, or can be reorganized under court supervision to continue operations under Chapter 11. Caution: General partners can be sued by the trustee in bankruptcy if partnership assets fall short of partnership debts.

Which type of bankruptcy solution ...