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Filing Bankruptcy Is Too Costly for Small Businesses, Experts Claim

Bankruptcy is an economic safety net that can be a beneficial tool for an individual or a business that's in debt. But, a panel of bankruptcy experts, claim that it's often too expensive for small businesses to file for bankruptcy. Thus, these experts, which includes lawyers from all over the U.S., urged members of a Senate Judiciary subcommittee "to change the rules to give small businesses a better shot at survival by filing for Chapter 11 protection."

Few businesses operate without taking on some form of debt. The problems that can arise with taking on debt can often be avoided by making sure that payments to creditors are made on time. When a business fails to pay on time, a creditor can seek to enforce a debt.

However, when a business can’t pay a debt being enforced, business owners often wonder what options they have to get rid of the debt. Below, you’ll find five of the top legal questions small business owners have about business debts and bankruptcies.

The legal marijuana businesses that have cropped up recently are true pioneers in the industry. Over the years, many have faced federal raids and prosecutions due to the conflict between state and federal law. However, there are several other unintended consequences of the conflict between state and federal law when it comes to the cannabiz.

In addition to not being able to conduct business across state lines, legal marijuana vendors also cannot claim protection from creditors in the federal bankruptcy courts. Again, this is due to the fact that marijuana is still considered a schedule I controlled substance under the federal anti-drug law, the Controlled Substances Act.

Your small business debts have outgrown your ability to operate, but you’re not ready to call it quits on your entrepreneurial dream. So before debt collection turns into a nightmare, you might consider Chapter 13 bankruptcy.

As opposed to other forms of bankruptcy, Chapter 13 may allow you to repay and discharge your debts over time, avoiding a liquidation of business assets and possibly allowing your small business to remain open. So how long does repayment last? And when will the debts be discharged under Chapter 13?

Even if your small business is filing for bankruptcy, there may still be some debts you'll need to repay. And who you'll need to repay -- and who you'll need to repay first -- will depend on how your creditors are classified. By the same token, if a client or customer is declaring bankruptcy, there's still a chance you'll get paid. And whether -- and when -- you'll get repaid will also depend on how your small business is classified as a creditor.

Therefore it's important to understand some bankruptcy terms from both sides of the coin. For instance, do you know which of your creditors are secured creditors in a bankruptcy? Do you know if you are one? Here's what you need to know.

Hope for the best; plan for the worst. It's a good life strategy that can be essential for small business owners. While most of us don't want to plan for -- or even consider -- our businesses going bankrupt, it's a sad reality that many startups don't end well. And meeting that end with the right plan can protect you as the small business owner and may even give your business a second chance.

So here are the most important things you need to know about small business bankruptcy, from our archives:

Filing for bankruptcy for your small business can be doubly painful. Any time an entrepreneurial dream dies is a sad day, plus, depending on how your company was structured, those business debts may affect your personal credit.

Chapter 7, or liquidation, can wipe out a lot of your small business's debt, but how long will that bankruptcy filing hamper your ability to buy a car for yourself? Here's a look.

If you're a small business owner pondering bankruptcy, you have a few filing options. While some would mean an end to your entrepreneurial dream, others may let you continue to operate your business while paying off your debts. And if you're not willing to say goodbye to your small business yet, you may consider filing for Chapter 11 bankruptcy.

Generally, Chapter 11 is intended for the reorganization of businesses with significant debt, and may allow your small business to propose a plan for profitability post-bankruptcy and continue to operate while temporarily keeping your creditors at bay. And while most Chapter 11 filings don't include liquidation of the business's assets, it may be permitted in some cases. Here's a look.

Entrepreneurs are optimists by nature -- no one starts their own business to see it fail. And the last thing most small business owners are thinking about when they're starting up is declaring bankruptcy. But failure is a fact of life, and not all businesses make it.

That said, declaring bankruptcy doesn't necessarily mean your small business is a failure. Plenty of big businesses have declared bankruptcy only to rebound stronger than before. But what happens to your business after declaring bankruptcy will depend on the type of bankruptcy you file. Chapter 7 and Chapter 11 are two of the most-filed types of bankruptcies for small businesses, so let's see how they stack up.

The dreaded b-word. No small business owner wants to think of their company going under, but in some cases it's inevitable.

But not all bankruptcies equal total failure. Chapter 11 bankruptcy can allow your business to reorganize, remain open, and repay your debt. Here's a look.