If your small business is failing and you have decided you do not want to run it anymore, what do you do?  Well first you have to decide how to close the business — should you file Chapter 7 bankruptcy or just wind it down under state dissolution laws? Both have their pros and cons.

Companies can go out of business without filing bankruptcy.  You cease operations, liquidate your assets and pay your creditors.  (There might be some more paperwork formalities with the state, but I won’t go over them here.)  In general, if there are no assets, the business cannot be further harmed by lawsuits that try to collect from that business. The pros of doing it yourself is that since you know everybody in your field and you are really motivated you can usually obtain higher prices for the assets than a third party would.  Also, you control who gets paid and when.  You can also act relatively quickly and limit your exposure on things like leases for space or equipment.  The cons of the process is that doing it yourself requires a lot of cooperation from your creditors and lessors.  And, if they are not being paid in full, your chances of getting sued personally are higher.  Some creditors will assume that you did something underhanded and that is why the business went under in the first place.  They may sue you as an individual and, whether their claim has merit or not, you will be forced to spend money litigating and defending a lawsuit.  The risk is even higher if you extended some sort of a personal guarantee to these creditors when you were running your business.

Chapter 7 bankruptcy, on the other hand, is a court-supervised liquidation.  Once you file on behalf of your business, a trustee will be appointed to liquidate the business assets and pay the business creditors according to their priority status.  While you lose control of the process and the timing of it all, the chances of creditors looking to you afterwards to satisfy their claims is lower.  Once the case is complete, the business will receive a discharge of debts.  If you have personal guarantees out there you may have to file a bankruptcy case for yourself as well.

The best course of action is to discuss all of these options with a qualified bankruptcy attorney.  And remember that a small business failure is not a personal failure at any level.  Many small businesses have a hard time competing in this economy and have used bankruptcy to get a fresh start.  If the new president elect had no shame doing it, you shouldn’t either.

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