Considering Filing for Business Bankruptcy? Eight Questions to Ask

There are always risks in business, and sometimes those risks turn into real financial struggles. At some point, a business owner may find that those struggles become overwhelming and threaten the ability of the company to continue. At this point, the owner faces the difficult decision of whether the best course of action is to file for bankruptcy protection.

Of course, there are many things to consider. These include the financial health of the business, the financial situation of owners and investors, and the potential for a business turnaround. Other things to take into account include the consequences and implications of filing for bankruptcy.

Here are some questions to think about.

1. Are you unable to meet financial obligations such as payroll, rent, vendor invoices, or loan payments on a consistent basis?

Many businesses struggle with cash flow and may shift around expenses throughout the month. However, being consistently late on payments or not making them at all is a red flag that the business will continue to dip deeper into deficit.

In Massachusetts, failing to meet payroll obligations can expose you to personal liability under Massachusetts wage laws even if the business is operated through a corporation. Filing a business bankruptcy before the business gets to a point where it cannot make its payroll can help avoid the potential personal liability for wage claims.

2. Have you exhausted all available sources of credit, capital, or restructuring options?

If you’ve maxed out credit lines, burned through reserves, and can’t access new funding or negotiate debt, it may be time to consider a legal reset through a bankruptcy filing.

Many small businesses in Massachusetts operate as LLCs or sole proprietorships. In these situations, your personal assets may already be at risk depending on how your debts are structured or guaranteed.

3. Have you personally guaranteed any of the business’s debts?

If your business fails, personal liability could follow. Filing for business bankruptcy coordinated with a personal bankruptcy strategy can help you protect your individual assets while resetting the business.

Personal guarantees are common in Massachusetts for lease agreements and small business loans. A Chapter 11 or Chapter 7 filing may be a part of a broader plan to limit cascading personal debt.

4. Are creditors taking legal action such as lawsuits, liens, bank levies, or eviction notices?

Once creditors start formal collection actions, your options narrow quickly. At this point, bankruptcy may be the best, and sometimes, the only tool to stop them.

Filing for bankruptcy creates an automatic stay under federal law, which stays most collection efforts, including evictions, foreclosure proceedings, repossession of personal property, and other actions to collect civil debts in Massachusetts.

5. Have you explored alternatives such as business restructuring, debt settlement, or assignment for the benefit of creditors (ABC)?

Business bankruptcy is a serious and disruptive step and, in most instances, should be a last resort. If the business is still viable, the business owner should explore non-bankruptcy options before filing a bankruptcy petition.

While ABCs are less common in Massachusetts than in some other states, like California, they are an option here. A qualified insolvency attorney can help assess whether a non-judicial wind-down is a better fit than a formal bankruptcy.

6. Is the business fundamentally viable but temporarily distressed?

If your business could survive with time and protection, you may be a good candidate to take advantage of Subchapter V of Chapter 11. This streamlined version of Chapter 11 is designed for small businesses with lower costs and fewer procedural burdens than a traditional Chapter 11 case..

To qualify to file a Subchapter V petition a business cannot have debts that exceed $3,024,750 and in Massachusetts, many small and mid-size businesses qualify. Subchapter V bankruptcy has only existed since February of 2020, and increasingly, businesses seem to recognize it as a more viable option than a traditional Chapter 11 case.

7. If you shut down today, what obligations would remain and who would be affected?

Understanding your exposure helps clarify what you’re really walking away from and what will remain. For example, tax debts are, for the most part, not dischargeable in a bankruptcy proceeding. It is also important to know that corporations can only discharge debts in Chapter 11 if the corporation obtains confirmation of a plan that calls for the company to continue operations and makes all of the plan payments, and to understand the priorities (i.e., the order in which creditors are paid) that exist in bankruptcy cases.

8. What are your goals for the next 12 to 24 months, and is bankruptcy a path forward or a controlled exit?

This is possibly the most important question. What are your ultimate goals? Bankruptcy can help to protect a business and carry it through a difficult time. Or it can be about protecting the owner, employees, and brand in a structured exit.

In Massachusetts, whether you’re trying to reorganize, sell assets, or wind down with dignity, a bankruptcy filing can offer court-supervised clarity. This can reduce long-term liability and reputational damage.

If your business is facing mounting pressure, you are not alone. And you are not without options. Bankruptcy is a legal tool. When used strategically, it can help you to protect your assets, manage liabilities, and make informed decisions about the future of your business. Whether you’re exploring ways to stay afloat or preparing for an orderly wind-down, asking the right questions now puts you in a stronger position for later. The sooner you assess your situation, the more control you will have over what comes next.