No one starts their own business anticipating that it is going to fail, but small business bankruptcy is a necessary way for an entrepreneur to deal with his or her debts in a fair manner. The business owner or his or her creditors can start the bankruptcy proceedings, but once the process is started, there are certain restrictions that come into play.

Once the small business bankruptcy ball gets rolling, the entrepreneur is barred from selling off any assets the business owns. Collection calls from creditors must stop. The business owner may actually feel a sense of relief once she either declares or is put into small business bankruptcy, since she can then focus on dealing with settling their debts.

There are two types of small business bankruptcy proceedings available to entrepreneurs. Chapter 7 bankruptcy may be considered the less complicated way to proceed. This option involves taking all the company's assets and selling them off to pay creditors. A trustee in bankruptcy is given the task of collecting all assets -- with the exception of those that a bankruptcy court judge has declared are exempt -- and disposing of them. The proceeds from the sale are divided among the company's creditors.

The second type of small business bankruptcy is known as Chapter 11. This option is a type of reorganization for the business. It gives the business owner the opportunity to restructure the company's debts so that she can be paid out of future earnings. In this situation, the Court will appoint a trustee in bankruptcy to oversee the proceedings.

Creditors are divided into two categories when it comes to small business bankruptcy. Secured creditors are ones to whom the debtor has given some form of collateral in return for a loan. Examples of secured creditors are banks who finance mortgages or financing companies who provide loans for equipment. These types of creditors will usually have the property or other items they have as collateral returned to them.

If the returned collateral does not fully satisfy the debt, the secured creditors are placed in the same category as the unsecured creditors. Unsecured creditors, such as credit card companies, get paid after the secured creditors when it comes to small business bankruptcy.

Bankruptcy for small businesses can be a complicated matter, and it's not something that an owner should enter into lightly. It should be kept as a last resort only, and only after a bankruptcy attorney has been consulted.