The past two years were difficult for small businesses. If debts became unmanageable, it may be necessary to file for bankruptcy. This decision and the options for filing bankruptcy in federal bankruptcy court require serious consideration.
Chapter 7 is a widely used business option and constitutes around 80 percent of consumer filings. Sole proprietorships use this filing more frequently, but it is available for corporations, limited liability corporations and partnerships.
This filing is a liquidation when a business lacks the assets to keep operating and cannot pay its current debts. After filing, a company usually closes and its officers, directors and employees are dismissed. A court appointed trustee assumes control to liquidate the business for the creditors’ benefit.
Filers seeking to discharge business debts do not have to meet income requirements. The trustee will divide business assets, however, and allocate them to creditors. After the creditors are paid, sole proprietorships may receive a discharge which eliminates their responsibility for paying debts. Corporations, LLCs, and partnerships are ineligible for formal discharges and anyone who signed a personal guarantee may be liable for the debt.
Certain assets may fall under federal and state exemptions protecting personal assets, such as the filer’s home.
Chapter 11 allows businesses to continue operations while reorganizing their debts. Businesses elect this opinion when they are not completely in debt and can continue operations as a viable company with bankruptcy court assistance.
Management stays in control and make business decisions with court approval. After reorganization, it will emerge from bankruptcy as a viable business and will not be liquidated.
Chapter 11 allows elimination of debt, sell non-performing assets, restructure long-term debt, and obtain new equity or financing. Businesses may negotiate with creditors on the length of repayment.
To qualify, business must receive regular revenues. A reorganization plan must be submitted to the court covering how and when debts will be repaid. Creditors and the court have to approve the plan.
Chapter 13 is usually used by consumers but may also be an option for businesses which may continue to operate. It is similar to Chapter 11 but is generally available to small businesses with few creditors and is less complicated and expensive. For qualification, unsecured and secured loans cannot exceed a specified amount.
Like Chapter 11, a reorganization plan must be submitted for court approval. Personal and business debts fall within the trustee’s authority.
Some debts may be discharged depending on the businesses’ personal and business income and expenses. Typically, the debt should be repaid in three to five years.
Attorneys can help business select reasonable options. They can also assist with bankruptcy proceedings.