FREE ESSAY ON BANKRUPTCY FOR SMALL BUSINESS

BANKRUPTCY FOR SMALL BUSINESS

Bankruptcy
Bankruptcy is defined in our text as "when a business is unable to pay its debts as they
come due." (Daft 778) Small business owners never start their businesses with the
intention of failing, however statistics show that in all likelihood they will not be
successful. This fact reveals the importance of understanding bankruptcy even before a
new business is formed. Small business owners who understand the bankruptcy law are
better equipped when their business does not succeed, allowing them to minimize lose both
professionally and privately. 
Prior to the Bankruptcy Reform Act of 1978, debtors had few rights; their debt often
resulted in imprisonment or involuntary servitude. When Congress passed the bill in 1978,
debtors where awarded many rights including the right to petition for bankruptcy under
federal law. This revised law has a two-fold purpose, first to protect debtors who have
over extended themselves and secondly, to distribute the debtors assets evenly to the
creditors. The Bankruptcy Act of 1978 allows failed business owners to cut their loses
and continue in new pursuits, making a file for bankruptcy a strategic business decision.
Small businesses normally file under three chapters including chapters 7, 11, and 13.
Chapter 7 deals with liquidations, Chapter 11 allows for reorganization, and Chapter 13
provides the debtor with individual repayment plans. 
Chapter 7 is also known as straight or ordinary bankruptcy, and accounts for the majority
of all filings, seventy percent. The process starts with the debtor voluntarily filing
Chapter 7 and then declaring all debts, or creditors forcing an involuntary petition. All
of the debtor's assets are then transferred to a trustee who sells the assets and
distributes their proceeds to creditors, hence the term liquidation bankruptcy. All debts
totaling more than the money given is then counted as losses by the creditor no longer
considered the debtor's responsibility. Secured creditors are compensated first, followed
by rectifying debt owed to unsecured creditors. If an involuntary petition is to be
filed, the creditors must first present it to the court. The next step in the process is
to determine the number of creditors. If the number of owed creditors totals 12 or over
then three with unsecured debt totaling $10,000 must file the petition, however if there
are less than twelve then only one with a $10,000 is required to file. Once the petition
has been filed then all creditors must allow an automatic stay, claims against the debtor
are suspended. 
Under Chapter 7, not all property is liquidated. State law sets many of the allowances,
but "Federal law allows a $15,000 exemption for ownership of a home, $4,000 exemption for
household items and clothing, and a $400 exemption for other property." (Daft 779) 
Transfer of property to other individuals to avoid seizure is not allowed by the courts.
The type of bankruptcy most filed is Chapter 11, providing for reorganization.
Small businesses are extremely susceptible to weakening under economic downturns or due
mistakes made by management. Often with a relief from debt they are able to regain their
feet and prosper; this is the instance in which Chapter 11 bankruptcy is utilized. The
result of filing under Chapter 11 is a plan formulated by both creditors and debtor to
repay portions of the balances and discharging the remainder. During this period of
repayment the company continues to operate under the observation of the court. Many of
the same principals used in Chapter 7 bankruptcy are also incorporated in Chapter 11;
involuntary or voluntary filings are possible, the order for relief follows the same
principals, and the debtor is granted an automatic-stay. Sometimes such arrangements are
made with court action; "creditors may prefer private, negotiated adjustments of
creditor-debtor relations, also known as workouts, to bankruptcy proceedings." (Cross
617) The benefits to the debtor company are numerous; employees are able to keep their
jobs, the company can still operate, and goods and services are delivered without
interruption. Despite these opportunities to continue businesses, statistics show that
many companies that file for Chapter11 will eventually file under Chapter 9 and liquidate
their business. The blemishes from a Chapter 11 are hard to overcome because internal and
external feelings of lost confidence are incurred. Chapter 11 still provides an important
last opportunity for businesses to succeed. The Hyatt Hotel Corporation is an example of
numerous successful Chapter 11 bankruptcies.
The final option for filing bankruptcy is Chapter 13. This is most commonly used in the
case of a sole proprietorship, because only an individual can file it. The debtor may
only file this form of bankruptcy on a voluntary basis. Once a Chapter 13 petition has
been filed it negates all collection attempts by creditors. The stipulations of the
filing include; the unsecured debt must not total more than $250,000 or the secured debt
cannot be greater than $750,000. Chapter 13 then requires the debtor to formulate a plan,
considering his annual income, which repays some or all he owes within a five-year time
span. Once approved by the court, the debtor pays the installments until completion, at
which time the remainder is discharged.
The ability to declare bankruptcy and effectively discharge part of debts owed to
creditors has many ethical implications. Many companies incur debt that they cannot cover
however, by declaring bankruptcy he damage the businesses of their creditor. Examination
of the bible reveals that the emphasis of the New Testament is on forgiving those who owe
us but are unable to pay, stating: "Forgive us our debts, as we also have forgiven our
debtors." ('Mt 6:12) The Old Testament also preaches the eventual discharge of debt,
stating: "At the end of seven years you must cancel debts." (Dt 15:1) The law allows for
the granting of mercy to debtors, but god commands that we forgive those who are not able
to repay their liabilities. The bible also contains a passage that explains the proper
action for the debtor, "Let no debt remain outstanding, accept the continuing debt to
love another..." (Ro 13:8) Subsequently the moral dilemma is solved, God wants us to make
all efforts to rectify our financial obligations. Business decisions should be made to
insure that the company does not over extend themselves, and if encouraged debt should be
paid. Filing for bankruptcy should not be utilized as the easy way out of financial
troubles; we are called to continue in our ventures, using bankruptcy only as a last
result. 
Bibliography
Work Cited
Scarborough, Norman, and Thomas Zimmerman. Effective Small Business Management. 
New Jersey: Prentice Hall, 2000.
Cross, Frank, Gaylord Jentz, and Roger Miller. West's Business Law. St. Paul: 
West P C, 1996.
New International Disciples Study Bible. Nashville: Holman Bible Publishers, 1988.