Bankruptcy has always been a subject to avoid. Small businesses and individuals have always tried to stay away from bankruptcy because financial disaster means a tough battle for anyone.

However, some of the most successful people in history started off with bankruptcies that threatened not only their personal lives but their business. Names such as Henry Ford, Milton Hershey and Walt Disney came out of bankruptcy situations to head some of the most successful businesses in history. Even today Ford cars, Hershey chocolate and Disney World amusement parks are historically great!

These great men took great risks to get their businesses to where they are today but why even take the risk at all? As long as you understand the basic principles behind bankruptcy you should be okay as far as getting in over your head.

Bankruptcy is particularly crippling if you don't understand how you got there and what you can do to avoid it in the future. In 2005 there was a new bankruptcy law passed, the Bankruptcy Abuse Prevention and Consumer Protection Act, which changed the scene for small business owners trying to make a difference.

Bankruptcy consists of three primary chapters- Chapter 7, 11 and 13. Each Chapter of bankruptcy has its own principles and its own purposes. In Chapter 7 bankruptcies, otherwise known as straight bankruptcies, a person's personal belongings are sold in order to pay off their creditors.

Pretty much anything of value is sold out the door to combat the debt they face. Certain things, such as a home and a car, may be held onto for obvious reasons. Many times in Chapter 7 bankruptcy all or most of the unsecured debt (credit card debt) is discharged, meaning the consumer doesn't have to pay it.

Chapter 13 bankruptcy is another of the Chapters of bankruptcy that has a lot of influence over individuals. Chapter 13 bankruptcies are geared toward reorganizing debt in a way that is more easily paid. Creditors just want to be sure that they are going to get paid and are usually willing to take a cut in interest to make sure they get their money.

The same is true when talking about Chapter 11 bankruptcies, which is more bent toward the needs of businesses. In either Chapter 11 or Chapter 13, creditors work out an agreement with you and the Courts in order for them to get their due share back.

The law of 2005 changed the rules when it came to Chapter 7 bankruptcy though. Instead of individuals just flying through the Chapter 7 bankruptcy process, hoping to have all of their credit card debt wiped out, they are now being forced to file for Chapter 13- so they have to pay it back!

This new law is sure to have its drawbacks (and benefits) for both individuals and small businesses. Since most individuals who usually claim a Chapter 7 bankruptcy will be denied it under the new laws, they will have no choice but to turn to the Chapter 13.

Small business owners better believe that the new law brings good news for them and their businesses. Because not as many individuals will be cleared to file for Chapter 7 bankruptcy, they will be forced into Chapter 13, meaning small businesses will get paid back for losses! If you are an unsecured creditor you can get paid for goods and services that were provided twenty days or more before the bankruptcy was filed.

This gives at least a little bit of protection for small businesses that otherwise would have to just accept bankruptcies as a loss. Now small business owners won't go home empty handed but with their piece of the pie!

This good news that is welcome by small business owners is frowned upon by debtors who used to see Chapter 7 bankruptcy as a quick way to get out of debt. Also many small businesses will have a tough time staying in business because once they hit bankruptcy one time (which many businesses do) they will have an incredibly tough time getting back into business.

The statistics say that over two-thirds of all entrepreneurs fail within their first year here in the United States so that means the small business economy here in the US is going to suffer big time due to the new law.

The new law says that you are a small business if your total debt is below two million dollars. If you are in this sector of businesses/individuals then you can at least get a trustee from the Court to overlook your financial history and decide which Chapter of bankruptcy to file.

If they think you have no chance of ever making it with your business then they will go ahead and recommend that you file Chapter 7. If it looks as if you could pay off your debts with valuable assets, they may choose Chapter 11 or Chapter 13.

The situation begins to get complicated at this point if the small business owner has a personal link to the business assets. In other words, if the business is tied to personal assets instead of being set up as an LLC (Limited Liability Company) there could be serious legal issues and the business owner risks losing personal assets too! Also, anything that hurts the businesses credit will be reflected in their personal credit history- which won't be a good thing if you are filing for bankruptcy!

The problem with the new law is that it is expected to create less small businesses to start up because they will be afraid of failure. One failure could put a business down for good and they won't be able to pop right back up like in the times of Henry Ford and Milton Hershey.

There are a few things you need to remember if you are still caught up in the way the law used to operate before 2005. One of the biggest changes since October 2005 is that in order to file for bankruptcy you must first have gotten counseling of a credit counseling agency six months prior!

This is to ensure a business or individual isn't using bankruptcy as a first option and that they actually have put some solid thought into it. The Court may consider some emergency situations where it wasn't possible to get the help of an agency.

Another big change is that attorney's are now liable for the actions of their clients. This means that any inaccurate information brought forth by the debtor that is proven wrong can come down on the attorney just as much as the debtor! The reason for this law is to ensure accuracy in all material presented to the judge. If the attorney is just as much at fault then they will try to have accurate information brought up.

A third big change when the new law took effect is that now everyone who files for bankruptcy must pass what is called a ‘means test.' The test monitors each person's ability to pay their debts back. This helps figure out who should file for which type of bankruptcy. Your living expenses, occupation, salary, savings and debt are all taken into consideration.

The last large change is that the new law allows room for an automatic dismissal of your bankruptcy claim if you don't provide all the documents that are Court required within 45 days of filing.

Talk with your attorney if you have any questions regarding what documentation you need to turn it. Some may include: credit counseling service proof, financial documents, tax information and statement of income.