Bankruptcy is generally seen as a financial failure, the end of the line, waving the white flag when you have no other options. However, this may be a limited point of view. If we take a closer look, you can see that bankruptcy is a procedure rife with misinterpretation and myths. Closer views will show that there is actually much more to it.

What Is Bankruptcy?

It’s important to understand what exactly bankruptcy means. For example, according to David M. Offen, a bankruptcy lawyer in Philadelphia, “the most common type of bankruptcy is Chapter 7. Often referred to as liquidation bankruptcy, Chapter 7 bankruptcy is used by those who don’t have a lot of property or other assets.” When this takes place, a trustee is appointed by a bankruptcy court to take possession of the assets of the business and distribute them among the creditors. Following this distribution process and payment for the trustee, the business receives a discharge, releasing the owner from an obligation to their debts. This is only one of three major types that you are likely to encounter.

Chapter 11 is generally reserved for larger corporations due to cost, but also gives you the greatest chance to continue on after bankruptcy. In this case, the business is reorganized under a trustee, who can sometimes be the owner. The company files a plan of reorganization outlining how it will deal with its creditors. Creditors will then vote on it, and a court will approve it if they find it fair and equitable. Get ready to wait, though, as it generally takes a year or more to confirm a plan.

Chapter 13 is rather unique, in that while it’s generally intended for consumers, you could turn it around for your business if you run a sole proprietorship. When you file, you provide a repayment plan with the bankruptcy court detailing how you are going to repay your debts. This would allow you to avoid losing personal assets that may be tied to your business.