Filing for bankruptcy should be your last resort.
If your business is a sole proprietorship or a partnership, the assets of the business cannot be held separately from your personal assets, and therefore a small business bankruptcy is, in effect, a personal bankruptcy. If your business is incorporated, it is considered by law to be an independent legal entity, and therefore gives you liability protection.
If you declare bankruptcy, you surrender everything you own to a licensed insolvency trustee in exchange for the elimination of your debts, and you get a chance to start over. Keep in mind, however, that your credit report will be affected, making it harder to get a loan in the future, and you are required to perform certain duties, like reporting your income to your trustee every month.
Before filling for bankruptcy, consider the alternatives.
Alternatives to bankruptcy
If you are having financial difficulties, and are considering filing for bankruptcy, first consider other options. These include reworking your budget, consolidating loans, selling assets or taking more formal actions such as a Division 1 Proposal, where you work with a trustee to offer to pay your creditors a percentage of what you owe them over a period of time.
Declaring bankruptcy may be the only way to deal with your creditors, if your business fails and you are unable to pay your debts. When you are in bankruptcy, your creditors cannot take your inventory or your assets to cover the amount you owe them, or garnish your wages if you get a job. A licensed insolvency trustee will take your assets and sell or use them to pay off your creditors.