Could Bankruptcy Be the Answer to Your COVID-19 Financial Woes?

Bankruptcy gets a bad rap. But for some dance businesses that are struggling due to the COVID-19 pandemic, it might be a smart way out of debt—and it doesn’t have to mean the end of your business.

closeup of shattered broken piggy bank with coins on rustic wooden table, representing bankruptcy
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The landlord wants the rent for your dance studio. The credit card company is calling about your outstanding balance. Vendors want to be paid for the dancewear you ordered pre-pandemic. You’re tired of receiving dunning letters (notifications that payment is overdue) and phone calls demanding payment and threatening legal action.

With dance performances on hold until further notice in much of the country, and dance studios in limbo between socially distanced and virtual classes, it’s a tenuous time for small dance businesses, and for many, revenue has taken a serious hit. But unfortunately, in most cases, the bills don’t stop coming.

Though bankruptcy sounds scary—and can come with a bit of a stigma—for businesses who’ve acquired significant debt with no end in sight, it can be a smart move. Plus, with certain types of bankruptcy, it doesn’t have to mean the end of your business.

Is bankruptcy right for you, and if so, what type? We’ve laid out some of the options—but business owners should consult with a bankruptcy attorney before making a decision.

Understand your bankruptcy options

Bankruptcy is a legal process that can get creditors off your back. Depending on the type of bankruptcy you use, you may simply go out of business and pay off creditors to the extent possible. Or, you may reorganize—meaning some debts are wiped out—and get a fresh start. Your bankruptcy options depend on how your business is organized from a legal perspective.

Chapter 7 is a liquidation that can be used by some individuals and businesses such as a limited liability company (LLC) or a corporation. After this process has been completed, the business is no more, though not all debts are dischargeable (e.g., child support, student loans, certain taxes and some other payments continue to be owed). While some property may be liquidated to pay creditors, some personal property (e.g., 401(k) plans as well as IRAs up to a set amount) is exempt property that continues to belong to the debtor despite bankruptcy.

Chapter 11 is a reorganization used by companies (other than sole proprietorships) that want to continue doing business. This could mean liquidating some assets, downsizing operations or negotiating with creditors. Usually businesses can continue to operate while filing Chapter 11, though possibly with some financial oversight. (The Small Business Reorganization Act of 2019, as well as the CARES Act, recently made changes to Chapter 11 to make it more affordable and accessible for small businesses.)

Chapter 13 is a repayment plan for individuals, including businesses run as sole proprietorships. The court requires certain payments to creditors for a set period of time, and some debts are absolved. Again, some debts, including nondischargeable debts, won’t be absolved. 

Owners who have personally guaranteed loans made by third parties to their LLCs, partnerships or corporations remain liable on them unless they are handled through personal bankruptcy.

Deciding which bankruptcy option is right for you is both a personal and financial decision. How close are you to retirement, for instance? Were your financial troubles brewing before the pandemic, or are they purely related to drops in enrollment or sales due to COVID-19? Do you see new revenue streams—perhaps a new online store, or a lucrative virtual class model—in your future? Talk to a CPA or other financial advisor to help you decide whether your business is worth saving or if liquidation is the best option.

What does post-bankruptcy look like?

If you choose to reorganize (Chapter 11) or use a repayment plan (Chapter 13), your business technically is still functional even though you’ve gone through a bankruptcy process. It’s likely that your customers won’t even be aware that you’ve filed for bankruptcy. But that doesn’t mean it won’t affect your business. Here’s what to expect post-bankruptcy.


Obtaining credit, at least initially, may be challenging because bankruptcy adversely impacts your credit rating or score. Personal bankruptcy for sole proprietors under Chapter 13 stays on your personal credit record for up to seven years from the date of filing. (If you liquidate under Chapter 7, bankruptcy remains on your record for up to 10 years.)

Business bankruptcy reorganizations don’t directly impact your personal credit rating, although loans you’ve guaranteed and defaulted on or paid late will certainly bring down your personal credit score. The business’ credit rating, which is separate from your personal rating, is adversely affected by bankruptcy.

However, the impact may not be as long-lasting as you might think. Individuals can raise their post-bankruptcy credit scores substantially by paying bills on time, even though the fact of bankruptcy remains on the credit report as indicated.


It may be difficult to continue doing business with the same vendors who likely have not received full payment as a result of the bankruptcy process. You may need to find new vendors willing to do business with you (and they may do credit checks before proceeding).


Despite bankruptcy, some taxes will continue to be owed (i.e., they are not dischargeable). The treatment of federal taxes under bankruptcy is very complex. Check IRS Publication 908 for the impact of filing under a particular option and be sure to discuss in advance your bankruptcy intentions with a CPA or other tax advisor.

Before you file for bankruptcy, explore these alternatives.

Between the cost of filing for bankruptcy (which varies depending on which option you choose and where you’re located) and attorney’s fees, bankruptcy can be an expensive endeavor (up to several thousand dollars).

Before you file, you may want to try to find other ways to handle your debts.

Negotiate with creditors.

Some creditors may be willing to negotiate to find more favorable payment terms (e.g., lower interest; smaller monthly payments) or even loan forgiveness. After all, this can be more favorable to creditors than bankruptcy, which can cancel some or all of what you owe to them.

You can negotiate yourself by talking to your landlord and other creditors. Or, you can hire a company to negotiate on your behalf.

Find more capital.

A loan or another source of new capital could help you pay off debts and avoid bankruptcy. One option: The Paycheck Protection Program, which is still accepting applications through August 8, and which forgives the loan under certain conditions. Other state and local entities may be offering other grants and support for small businesses right now.

Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2020: Your Complete Guide to a Better Bottom Line and publisher of “Idea of the Day” at