What is Bankruptcy? Bankruptcy is essentially the inability of a person, entity, corporation or organization to pay their debts. There are two common types of bankruptcy. The first is Chapter 7 bankruptcy. In this bankruptcy, the debtor is seeking to have his debts wiped clean. He is telling the court, "Here are my assets. Give what I have to my creditors, and then wipe the slate clean so I can start over." The debtor is the allowed to keep a few of his or her assets, such as a house and some belongings.

The second type of bankruptcy is called Chapter 11 bankruptcy. In this case, the debtor is attempting to have the court take control of his finances and to work with all the creditors to formulate a repayment plan. The plan will allow the debtor to continue in business while the debts are being repaid.

How Do You Avoid Bankruptcy within a Small Business? Bankruptcy is not a quick fix to your financial problems. Filing for bankruptcy should be the last step you take after all else has failed. Here are some alternatives you should consider before filing for bankruptcy:

Bankruptcy is not a quick fix to your financial problems. Filing for bankruptcy should be the last step you take after all else has failed. Here are some alternatives you should consider before filing for bankruptcy:

Sell Your Assets Since you will lose most of your valuable assets after filing bankruptcy anyways, try selling things before hand. This includes office downsizing, selling equipment, and removing unnecessary extras (catering, company trips, company cars, cable TV, etc.) Reorganize Your Debt Consider debt consolidation or negotiation. This won't eliminate debt, but it will help organize your finances. Consult a lawyer Since bankruptcy laws differ by location, you want to pay attention to legal procedures in your area. Consulting a lawyer will make sure you have all the information you need before hand. Communicate Your Options You can communicate with creditors and vendors about your financial status. Let people know you cannot pay your debts and are considering bankruptcy. Many creditors would rather you pay back part of what you owe than have you file bankruptcy and not pay them anything.

How Does Bankruptcy Affect a Small Business?

Federal law allows for a bankruptcy to be recorded as part of a debtor's credit history for 10 years. Whether or not the debtor will be granted credit during the years following bankruptcy is unpredictable. They also recognize that the debtor cannot file again for bankruptcy for at least the next six years. However, the FHA only precludes debtors from obtaining a new FHA mortgage for two years, provided the debtor has an otherwise acceptable credit standing during the two-year period. And because a home is typically the largest purchase individuals make, financing for a new home may still be available shortly after the bankruptcy action is completed. Some debtors retain a credit card with a very low (or no) balance, but a large credit line, by purposely omitting the debt from the filing, to ensure they will have future credit available. However, many banks periodically check customer's credit reports and will cancel the card anyway. In addition, any recent shuffling of debt from the card retained to the listed cards is likely to be considered fraudulent. This is especially true if it happened in the year leading to the bankruptcy. Debtors can, after bankruptcy, voluntarily pay a discharged debt to a creditor, such as a doctor or hospital, toward whom they feel a special moral obligation or with whom they wish to maintain credit. In some cases, you may be able to discharge most or all of your unsecured debts, such as credit card debts, while preserving all of your assets. In addition, at times, the most efficient way to eliminate a portion of a lien may be to file a bankruptcy action.