Total bankruptcy filings in the United States continue to rise. In 2025, business filings increased by 7.1 percent to just over 24,700, while non-business filings jumped 11 percent to nearly 550,000. Bankruptcy is not only common—it can also take a significant emotional and financial toll. Understanding the available options can make a critical difference. Below are common causes of bankruptcy, alternatives that may help avoid it, and the protections available if filing becomes necessary.
Common Causes of Small Business Bankruptcy
Small businesses often turn to bankruptcy after experiencing persistent cash flow problems, excessive debt, or rising operating costs. Other contributing factors may include:
- Poor financial planning or management
- Loss of a key client or contract
- Economic downturns
- Significant lawsuits or legal liabilities
- Overexpansion or rapid growth without sufficient capital
Alternatives to Bankruptcy
Before filing for bankruptcy, small business owners may want to explore these common alternatives:
Negotiation
Many creditors are willing to negotiate payment plans or reduced balances. Early and proactive communication is key.
Debt Restructuring
Consolidating loans, extending repayment terms, or refinancing at lower interest rates can reduce monthly payments.
Cost-Cutting Measures
Reducing overhead by downsizing space, eliminating non-essential expenses, or renegotiating leases can improve cash flow.
Asset Sales
Selling non-essential assets or parts of the business can generate cash to pay down debt.
Finding Additional Capital
Seeking investors, applying for loans, or exploring alternative financing options may provide temporary relief.
Professional Guidance
A financial advisor or business consultant can help identify strategies to stabilize and restructure the business.
Bankruptcy Protections for Small Businesses
When bankruptcy becomes unavoidable, several options and protections may be available, depending on the business structure and financial situation.
Chapter 11 Reorganization
Chapter 11 allows a business to continue operating while reorganizing its debts. An automatic stay goes into effect, stopping collection efforts, lawsuits, and foreclosures. Subchapter V offers a streamlined and more affordable version of Chapter 11 designed specifically for small businesses.
Chapter 7 Liquidation
Chapter 7 typically results in the closure of the business and the sale of its assets to pay creditors. This option is often chosen when the company has no viable path to profitability, and the owner wishes to exit.
Chapter 13 for Sole Proprietors
Chapter 13 is available only to sole proprietors and allows them to reorganize both business and personal debts. The business can continue operating while debts are repaid over a three- to five-year period. Debt limits apply, and the owner must have regular income to fund the repayment plan.
Asset Protection Through Exemptions
Bankruptcy may protect certain assets through state and federal exemption laws. These exemptions typically cover assets necessary for living and working, such as a primary residence, vehicle, personal property, and retirement accounts.
Get Trusted Legal Help
Small business bankruptcy is complex, and professional guidance is strongly recommended. The Law Office of Todd Cushner & Associates is ready to help. Todd Cushner is a bankruptcy attorney serving White Plains, Westchester, and the surrounding areas, and is a valuable resource for small businesses facing overwhelming debt. Bankruptcy and other legal matters won’t wait. Contact us today to get started.
