Bankruptcy is a legal action taken by a business or individual when they are unable to pay off their debts.
There are 3 bankruptcy options for a small business: Chapter 7, Chapter 11, and Chapter 13 (see separate glossary definitions). The purpose of declaring bankruptcy is to pay off debt or get your debt legally written off. You will either liquidate the business by selling off assets and putting the proceeds toward the debt (Chapter 7), reorganizing the business and debt (Chapter 11), or developing a court-approved repayment plan (Chapter 13). Bankruptcy can protect a small business from legal action by creditors; however, it may not be the best option. Always consult a lawyer and/or accountant before filing for bankruptcy.
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Bankruptcy: Options for Small Business