Time to Fold? Here's a Primer

Nonetheless, it's useful to gain an understanding of bankruptcy basics. Following are some brief descriptions and helpful tools:

The Three Bankruptcy Laws

Chapter 11 is the bankruptcy description that's applied to a corporation that has sought bankruptcy protection. Chapter 11 provides a way for a business to place creditors on hold. This gives the filer an opportunity to reorganize; usually pay creditors some fraction of what they're owed, and also catch up. Technically, this form is also open to individuals with very high debts.

However, in relation to the other forms of personal bankruptcy, the administration and oversight are a significant burden and cost. Statistically, the failure rate of Chapter 11 cases (meaning they don't survive even after going through Chapter 11) is extremely high. Companies lose out after having spent a hefty amount on attorney's fees.

Chapter 7 is an option for individuals, including small business owners. This form of bankruptcy means that you'll give your non-exempt assets (clothes and household goods are exempt), including your business, to the bankruptcy trustee. The trustee will then sell any marketable assets and disperse the cash to creditors in order of priority provided in the bankruptcy code.

The benefit of Chapter 7 is that most of your non-secured debts -- such as your credit cards -- will be eliminated, essentially wiped clean. This generally doesn't eliminate obligations for debts such as recent income taxes, student loans, child support and similar obligations. Another interesting possibility is for the trustee to sell all of your non-exempt assets. If he can't sell something, such as your business, it reverts back to you.