The number of business bankruptcy filings in May 2010 declined slightly over the previous month. However, business bankruptcy filings were up 38% in 2009 over 2008. With the current economic situation, more and more businesses are filing. The question is, "Should your business file Chapter 7 or Chapter 11 Bankruptcy?"

Bankruptcy is one of the few business practices specifically mentioned in the U.S. Constitution. The Founding Fathers recognized that some protection for debtors was necessary in order to foster a certain degree of risk taking by entrepreneurs. In the majority of cases, the petition is filed by the debtor (voluntary bankruptcy), although creditors can file a bankruptcy petition against a business that has continuously made late payments and/or which the creditor believes has become insolvent (involuntary bankruptcy).

The primary purpose of bankruptcy is to implement a court-supervised plan to deal with debts that cannot be paid in full. There are two major types of bankruptcy available to business owners/stockholders - Chapter 7 (to close the business entirely) and Chapter 11 (to enter into a repayment plan while continuing to operate the business).

In individual bankruptcy, the debts of the petitioner are discharged. This is not true, however, for businesses. Corporations do not get a fresh start in a Chapter 7. For this reason, a debtor may choose to look to the state's dissolution statutes rather than filing Chapter 7 bankruptcy. In most cases this would be better for a business wishing to cease to exist.

There are a few instances in which a business might choose to file Chapter 7 rather than dissolution. One reason would be to protect friendly creditors from the actions of more aggressive creditors. If one creditor is essentially wrecking the asset value of the entire company through garnishment, repossession, or attachment, a Chapter 7 bankruptcy would create the climate for a more fair and orderly distribution of the remaining assets. This could be very appealing to small businesses where close friends or family members have made investments in the company.

Reorganization under Chapter 11 is primarily for businesses capable of survival if their debt overhead were drastically reduced. It is also an excellent device for businesses to free themselves from most contractual relationships (e.g., leases) that are not profitable. Chapter 11 gives the business an opportunity to reset itself free from the collection efforts of its creditors.

Reorganization will not help a failing business model. If a business' production costs exceed its gross sales, bankruptcy will not help. Bankruptcy restructures debt and terminates unprofitable business relationships. It does not allow businesses to keep their doors open to lose more money in the future. In businesses that have few assets, poor cash flow, or are merely extensions of the owner's skills and personality, it may not pay to reorganize.

If your business is facing serious financial struggles and you are wondering how to fix the problems, there are several bankruptcy and non-bankruptcy options available. An experienced attorney can explain your options and help you determine which is best for you. At Dunlap, Grubb, and Weaver we have attorneys and staff with the experience and expertise necessary to assist you in choosing the best solution for your business.