Bankruptcy for your business can be a traumatic event. However, it can become necessary, and at a certain point there is a need to move on in your economic life, just like it can become necessary in your personal life. Bankruptcy can happen to a business in a variety of ways. When someone is running a home business, they may have a series of orders that fall through while production or buying of inventory continues. They find themselves stuck with more inventory than they no what to do with and may simply sell off the inventory for whatever price they can and stop the business by inertia.

If someone has gotten loans to start up their home business, then they can be forced to go through a formal Chapter 11 or Chapter 7 bankruptcy. This can be even more difficult if you have been operating as a self-proprietorship, and your personal assets are the backup for your business operations. Often, it is worthwhile, even for a fairly small business operation, to form an LLC, a Limited Liability Company, to be able to separate your business assets from your personal assets. This can cost about $500, but it is well worth the protection you receive in this way. Of course, you may still need personal bankruptcy protection if you had put up personal assets in order to take out loans.

Bankruptcy does not have to be a straight liquidation process. In fact, as we look at big business, many large firms go through a Chapter 11 Bankruptcy, a reorganization of their assets and debts and emerge to continue in business. Or they are bought out by other companies. For example, there was the large bankruptcy of the retailer K-Mart that was subsequently bought out by Sears and since then seems to be doing fairly well. This type of reorganization can apply to small businesses that have been doing well, but may have overextended themselves and temporarily cannot pay their debt on time. By writing off debt, or portions of it, and converting short-term debt to long-term debt, a business that has bitten off more than it can chew, can be brought back from the brink and be reorganized to continue in business. Two-thirds of the creditors committee in the bankruptcy has to agree to the reorganization plan. Larger and some smaller firms can get financing while in bankruptcy, in order to be able to successfully reorganize.