Common Myths About Small Business Bankruptcy

Small business bankruptcy can be an overwhelming topic for many business owners in Nevada. When a business faces financial hardship, the idea of filing for bankruptcy often raises several questions and concerns. Unfortunately, many misconceptions surround small business bankruptcy, making it harder for business owners to make informed decisions. 

These myths can lead to unnecessary anxiety, poor choices, and missed opportunities to resolve financial struggles. The Law Office of Scott N. Tisevich, Esq will help address some of the most common myths about small business bankruptcy in Reno, Nevada, and provide clarity on what the process truly involves.

Myth #1: Small Business Bankruptcy Always Results in Business Closure

One of the most persistent myths about small business bankruptcy is that it will always result in the closure of the business. While this is a common misconception, the reality is far more nuanced. 

Filing for bankruptcy doesn’t necessarily mean a business must shut down. In fact, bankruptcy laws are designed to help businesses get back on their feet rather than force them into liquidation. For small businesses in Nevada, there are several bankruptcy options available, each with its own set of rules and outcomes:

• Chapter 7 bankruptcy: This type of bankruptcy involves liquidating assets to pay off creditors. While some businesses may be forced to close in this process, it’s not guaranteed. Many small business owners choose to sell off assets, pay creditors, and then restart their operations with a fresh start.

• Chapter 11 bankruptcy: Often known as “reorganization” bankruptcy, this type allows a business to reorganize its debts, properties, and affairs. The debtors can propose a repayment plan and keep their business operational in the meantime.

• Chapter 13 bankruptcy: This type of bankruptcy is often available to sole proprietors or small businesses with fewer assets. It allows for a repayment plan over several years, enabling the business to continue operating during the repayment process. The sole proprietor, however, must file for this type of bankruptcy as an individual.

Ultimately, while bankruptcy may be a sign that a business is struggling, it doesn’t automatically lead to closure. In many cases, it can provide a much-needed chance for survival and recovery.

Myth #2: Bankruptcy Discharges All Business Debts

Another widespread myth is that small business bankruptcy will discharge all of a business’s debts. While bankruptcy can provide significant debt relief, it doesn’t erase all types of financial obligations. 

Certain debts are non-dischargeable, meaning they’ll survive the bankruptcy process. In Nevada, as in other states, the following types of debts are typically not dischargeable in small business bankruptcy:

• Taxes: Many types of business taxes, such as payroll taxes or sales taxes, aren’t dischargeable. However, some older tax debts may be eligible for discharge depending on their age and other factors.

• Debts from fraudulent activities: If a business owner has engaged in fraud or deceit, debts arising from those activities won’t be discharged in bankruptcy.

• Alimony and child support: Personal obligations like alimony or child support can’t be erased through bankruptcy.

• Debts from personal guarantees: If a business owner personally guaranteed a loan or other debt, they may still be responsible for paying that debt even if the business files for bankruptcy.

While small business bankruptcy can eliminate many forms of debt, it doesn’t apply to all financial obligations. Business owners should consult with a bankruptcy attorney in Nevada to better understand which debts may or may not be discharged.

Myth #3: Small Business Bankruptcy Will Ruin Your Personal Credit

For many business owners, especially those who operate as sole proprietors or have personally guaranteed business debts, a major concern about bankruptcy is its effect on personal credit. While bankruptcy can negatively impact an individual's credit score, the damage isn’t permanent.

In fact, many business owners who file for bankruptcy begin to rebuild their credit scores over time, often starting soon after the bankruptcy process is complete. The impact of small business bankruptcy on personal credit depends on how the business is structured:

• Sole proprietorship: If the business is a sole proprietorship, there’s no distinction between personal and business finances. This means that filing for small business bankruptcy may affect the owner’s personal credit score since the debts are tied to their personal assets.

• LLC or corporation: When a business is structured as a limited liability company (LLC) or corporation, its debts are separate from the owner’s personal finances. This can help limit the damage to the owner’s personal credit, though the business’s credit may also be affected.

While a bankruptcy filing will hurt credit scores, it’s not a permanent barrier to obtaining credit in the future. With responsible financial management, business owners can work to rebuild their credit and secure financing down the road.

Myth #4: Bankruptcy Is Only for Businesses That Are About to Close

A common myth about small business bankruptcy is that it’s only for businesses that are on the brink of shutting down. This belief often discourages business owners from considering bankruptcy as a solution when they’re facing financial challenges.

In reality, bankruptcy is a tool that can help struggling businesses get back on their feet, even if they aren’t at risk of closing. For businesses in Nevada, bankruptcy can provide a much-needed reprieve from overwhelming debt. 

In the case of Chapter 11 bankruptcy, for instance, a business owner has the opportunity to reorganize their debts and continue operations while paying off creditors. This can be an excellent option for a business that’s still viable but needs time to restructure its finances.

In Chapter 13 bankruptcy, small business owners who are sole proprietors can develop a repayment plan to address their debts while continuing to operate. This option can be especially useful for smaller businesses that don’t want to close but need some breathing room to stabilize their finances.

Thus, bankruptcy isn’t solely for businesses on the verge of closing. It can also be an effective strategy for businesses seeking to reorganize and recover from financial difficulties.

Myth #5: Small Business Bankruptcy Is Too Expensive

Another misconception is that the cost of filing for small business bankruptcy is too high for most business owners to afford. While there are costs associated with filing for bankruptcy, they’re not as prohibitive as many people believe. 

In fact, bankruptcy can often be more affordable than trying to pay off overwhelming debt over time without legal protection. The costs of filing for small business bankruptcy include:

• Filing fees: Bankruptcy court filing fees are generally a few hundred dollars, depending on the type of bankruptcy being filed.

• Attorney fees: While hiring an attorney isn’t required, many business owners in Nevada find it beneficial to seek professional help to face the process. Attorney fees can vary based on the intricacy of the case, but they can often be more affordable than the costs of failing to resolve the business’s financial issues.

For smaller businesses, Chapter 13 bankruptcy is typically more affordable than Chapter 11, which is designed for larger businesses with more complicated financial situations. Chapter 7 bankruptcy, on the other hand, may involve liquidation costs but can also offer debt relief without an expensive reorganization process.

Many small business owners in Nevada find that bankruptcy provides long-term financial relief, making the initial costs worthwhile.

Myth #6: Bankruptcy Will Destroy Your Reputation

There’s a pervasive belief that filing for small business bankruptcy will irreparably damage an owner’s reputation. In reality, bankruptcy is a legal process designed to help businesses recover from financial hardship. 

It’s not a moral failure or a reflection of a business owner’s character. Most people—including creditors, investors, and potential customers—understand that financial challenges can happen to any business.

In some cases, filing for bankruptcy can even enhance a business owner’s reputation. By choosing to confront their financial issues head-on and follow the proper legal steps, business owners show that they’re committed to resolving their debts responsibly. 

This can lead to increased trust from creditors, vendors, and customers, who may view the business owner’s actions as evidence of their integrity. Rather than destroying a reputation, bankruptcy can provide an opportunity for business owners to demonstrate their ability to rebuild and move forward.

Myth #7: Business Bankruptcy Is Only for Large Companies

Some small business owners mistakenly believe that bankruptcy is a tool reserved only for larger companies with millions of dollars in debt. However, small businesses can also face financial difficulties that make bankruptcy a viable option. In fact, small businesses are some of the most frequent filers of bankruptcy, especially in tough economic times.

Nevada’s laws provide several avenues for smaller businesses to resolve their financial issues through bankruptcy, regardless of their size. Whether a business is facing unpaid taxes, overwhelming debts, or other financial pressures, bankruptcy can offer the chance to either reorganize or discharge debts, depending on the circumstances.

Small businesses may benefit from Chapter 7, Chapter 11, or Chapter 13 bankruptcy, and Nevada’s relatively low filing fees make the process more accessible for smaller business owners.

Reach Out to The Law Office of Scott N Tisevich, Esq Today

By debunking these myths, small business owners can approach bankruptcy with clarity and confidence, turning a challenging situation into an opportunity for recovery. Serving Reno, Nevada, as well as Churchill County, Lyon County, Carson City, Story County, Douglas County, and Las Vegas, you can count on Scott N. Tisevich for reputable legal representation. Reach out to The Law Office of Scott N. Tisevich, Esq today.