people going through paperwork
From the effect on your taxes to whether or not you anticipate needing credit within the next 10 years, there are several questions to ask prior to filing for bankruptcy. — Getty Images/fizkes

Bankruptcy can be a complicated and costly issue for any business to face. While you may think bankruptcy signifies financial failure, it can be the start of a new beginning in helping you manage your business's finances and getting you back on track.

"Bankruptcy … can be an effective way of dealing with your creditors when your business is in trouble," said Paul Miller, CPA and owner of Miller & Co, LLP.

If your business is struggling, especially due to COVID-19, the recently passed Small Business Reorganization Act of 2019could mean that now is an ideal time to file for bankruptcy. This law makes it easier for small firms to reorganize and rehabilitate, and you no longer need to gain approval from creditors when moving forward with your reorganization plan.

[Read more: A State-by-State Guide to Coronavirus Financial Assistance]

Should I file for bankruptcy?

Before you decide to file for bankruptcy, Miller suggests reviewing the following questions with your accountant to determine if it's the right choice for you:

  • How long do you have to pay back loans and deferred payments?
  • Will you need access to credit in the next 10 years?
  • Have you talked to your creditors about various payment options?
  • Does your consumer debt equal more than half your income?
  • Will negotiating your debt result in a higher tax burden?
  • How much of your forgiven debt will be applied to your next tax return?

"Don't wait too long to call your accountant to have that conversation," Miller said. "You're paying bills from a dwindling cash reserve, but those bills may be wiped out with bankruptcy. And the sooner you file, the quicker you can restore your credit and get back on track."

If your business is struggling, especially due to COVID-19, the recently passed Small Business Reorganization Act of 2019 could mean that now is an ideal time to file for bankruptcy.

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How to file for bankruptcy

Once you and your trusted financial professional such as an accountant have decided filing for bankruptcy is the best decision for you and your business, follow these steps to complete the process.

Decide on the type of bankruptcy that's right for you

Depending on your business's legal structure and assets, you may be eligible to file for either a Chapter 7, Chapter 11 or Chapter 13 bankruptcy.

Here is a basic overview of each type:

  • Chapter 7 bankruptcy is for businesses that intend to shut down and liquidate their assets to pay off debts.
  • Chapter 11 is for businesses that intend to stay in business by reorganizing their finances to pay their debts.
  • Chapter 13 is for sole proprietors who wish to reorganize personal and business debts with a single case.

Miller noted that your accountant or financial professional can help you determine which of these options best serves your interests.

[Read more: How to Choose the Right Business Structure]

Compile your financial records

If you're filing for bankruptcy, the court is going to want to see your financial records. Preparing your income, expense, asset and debt statements early will give you a better understanding of what your financial profile looks like and what your path forward might look like.

Get credit counseling and take debtor education courses

This step is a required part of the process for individual bankruptcy filers. You will typically start with credit counseling and then after you file for bankruptcy, you'll take debtor education courses.

When selecting a credit counseling and debtor education program, look for ones that have been approved by the U.S. Trustee Program so you can receive the required certificates of completion.

Find a bankruptcy attorney

Hiring an attorney is an obvious added expense during an already difficult financial period. While it is not required for individual bankruptcy filers, the right legal assistance can save you money in the long run.

A bankruptcy attorney can help you understand the bankruptcy laws along with which debts can and can not be released. An attorney can also help ensure you follow the correct policies and rules set forth by the court and that the appropriate bankruptcy forms are correctly completed and filed.

File your bankruptcy petition

Visit the United States Courts website to download all applicable forms for your bankruptcy petition. Once your forms are completed and reviewed by your bankruptcy attorney (if you hired one), you'll file them with the local court for the municipality or county where you live or where your business has operated from over the past 180 days.

After your petition is filed, the rest of the process varies depending on the type of bankruptcy you chose.

Bankruptcy is a scary word for many consumers and business owners, but it could be the solution you need to get your finances back in order. Before making any decisions, be sure to consult with a financial professional to find out what's right for your business.

[Read more: With Bankruptcy Behind It, David’s Bridal is Now ‘Rewriting the Rules’]

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