Bankruptcy is defined in our text as "when a business is unable to pay its debts as they come due." (Daft 778) Small business owners never start their businesses with the intention of failing, however statistics show that in all likelihood they will not be successful. This fact reveals the importance of understanding bankruptcy even before a new business is formed. Small business owners who understand the bankruptcy law are better equipped when their business does not succeed, allowing them to minimize lose both professionally and privately. Prior to the Bankruptcy Reform Act of 1978, debtors had few rights; their debt often resulted in imprisonment or involuntary servitude. When Congress passed the bill in 1978, debtors where awarded many rights including the right to petition for bankruptcy under federal law. This revised law has a two-fold purpose, first to protect debtors who have over extended themselves and secondly, to distribute the debtors assets evenly to the creditors. The Bankruptcy Act of 1978 allows failed business owners to cut their loses and continue in new pursuits, making a file for bankruptcy a strategic business decision. Small businesses normally file under three chapters including chapters 7, 11, and 13. Chapter 7 deals with liquidations, Chapter 11 allows for reorganization, and Chapter 13 provides the debtor with individual repayment plans. Chapter 7 is also known as straight or ordinary bankruptcy, and accounts for the majority of all filings, seventy percent. The process starts with the debtor voluntarily filing Chapter 7 and then declaring all debts, or creditors forcing an involuntary petition. All of the debtor's assets are then transferred to a trustee who sells the assets and distributes their proceeds to creditors, hence the term liquidation bankruptcy. All debts totaling more than the money given is then counted as losses by the creditor no longer considered the debtor's responsibility.
