If you’re a small-business owner wondering how to file business bankruptcy, you may be relieved to know that it’s possible to continue running your business even after filing for bankruptcy. In fact, bankruptcy can often be the key to helping a struggling business stay afloat and even thrive. The type of bankruptcy you choose will depend on several factors, including your business structure, assets and debts, and income level. By carefully considering these factors, you can determine whether Chapter 7, 13, or 11 bankruptcy is the best option for your business. Keep reading to learn more about the factors you should consider when deciding how to file for business bankruptcy.
What Happens When a Business Files for Bankruptcy?
- Businesses in Chapter 7 bankruptcy. Chapter 7 bankruptcy is a “liquidation”. The trustee is responsible for selling property and dispersing the proceeds to creditors. Nearly all Chapter 7 bankruptcy cases are filed by businesses. This chapter is considered the fastest and most cost-effective type of bankruptcy.
- Businesses in Chapter 11 bankruptcy. Chapter 11 is a “reorganization bankruptcy”. Your creditors and you create a plan for paying your bills in a way that allows the company’s operations to continue. Keep in mind that Chapter 11 can be expensive and time-consuming. Small businesses can find a shorter, more cost-effective version of Chapter 11, Subchapter V.
- Owners in Chapter 13 bankruptcy. Chapter 13 is a “reorganization bankruptcy” for sole proprietors only. A Chapter 13 bankruptcy can be used to reduce personal debts such as credit card balances. This can help a business remain open.
Businesses don’t file bankruptcy as often, particularly not Chapter 7. Business bankruptcy lawyers can help business owners to use bankruptcy filings more strategically. This is due to the limitations of bankruptcy and the pros and cons of each chapter.
This is illustrated by the chart below, “When a Business Files to Bankruptcy”. This chart can be used to help you understand your bankruptcy options.
When a Company Files for Bankruptcy
The following chart highlights the main points you should consider when deciding whether your company or organization should file for bankruptcy. However, it does not address all issues. Consulting with Bruner Wright’s bankruptcy attorney is the best way to protect your assets.
|Chapter 7||Chapter 13||Chapter 11|
|Sole Proprietor files for bankruptcy||
|Partnership files for bankruptcy||
|Corporation files for bankruptcy||
|Business owner files for bankruptcy||
What Happens When a Business Files for Chapter 7?
Most cases will result in the closing of the business by filing a Chapter 7 bankruptcy. Why? Because the property that is owned by a separate legal entity, such as a corporation or limited liability company (LLC), cannot be protected. The trustee sells business assets and pays its creditors before closing down the business.
A company filing Chapter 7 does not wipe out its debt or “discharge”. The company’s debt does not disappear, and bankruptcy does not reduce the owner’s personal responsibility for it.
This rule is not applicable to the exception. If a sole proprietor is a service-oriented file for Chapter 7 (more details below).
How a Business Can Benefit From Filing for Chapter 7 Bankruptcy
Chapter 7 bankruptcy is available to companies that are corporations or limited liability companies (LLCs). This allows them to liquidate and close the business transparently. These companies must file Chapter 7 bankruptcy to be able to liquidate their assets and pay creditors.
Why Small Businesses Rarely File for Chapter 7 Bankruptcy
Your business will not receive a discharge from its Chapter 7 debts unless you are a sole proprietor. If you are somehow responsible for the debts of your business, such as a personal assurance, then you will still be responsible unless you file an individual Chapter 7 bankruptcy.
Here are some other things to keep in mind:
- Exemptions cannot be used to protect assets during business bankruptcy. The trustee will sell all assets of the business to pay creditors and then shut down the business.
- Many owners can close down their businesses without the need for help. This saves them from paying bankruptcy attorney’s fees and other costs.
- Most business owners can negotiate a higher price for their business assets and pay less of the business debt. This leaves them with less debt to pay for through personal guarantees.
- Chapter 7 bankruptcy can put the personal assets of partners at risk.
- A bankruptcy filing can open the door for litigation regarding fraud, a partnership dispute, and creditors to file objections or claim that officers did not follow corporate formalities. Members or shareholders should also pay the business debt using personal assets.
These are just a few reasons why it is important to consider the potential risks of closing down a business via bankruptcy. The primary benefit of a transparent liquidation is the business assets, is the main benefit.
Chapter 7 Is Most Beneficial for Sole Proprietors and Business Owners
Sole proprietors who are service-oriented and want to keep their businesses open, as well as business owners who have closed down their companies, will benefit the most from Chapter 7 bankruptcy.
How Business Owners Can Benefit From Filing Chapter 7
After a business closes, many business owners file personal bankruptcy. It is often more efficient because it achieves the most fundamental goal of business owners, which is to eliminate their obligation to pay personal guarantees and other business liabilities.
How Sole Proprietors Can Benefit From Filing Chapter 7
A Chapter 7 bankruptcy filing rarely works in a business owner’s favor, except when the sole proprietor is providing a particular service. These are the benefits that Chapter 7 provides sole proprietors who provide services.
- You can eliminate both business and personal debts by filing a single Chapter 7 case.
- You don’t have to pay the income requirements for the Chapter 7 means testing if your business debts exceed those of your personal obligations (this rule applies to everyone filing for Chapter 7).
- Many service-oriented businesses like accountants, freelance writers, or fitness trainers survive Chapter 7. This is because the bankruptcy trustee cannot sell your ability to provide the service.
- Sole proprietorships that are service-oriented don’t require much equipment or products that might be lost in bankruptcy.
- To protect relatively small assets that are associated with a service-oriented company, sole proprietors can use bankruptcy exemptions
Chapter 7 is a good option for sole proprietors who have little or no assets. It will pay off all business debts, and the owner can continue to provide the service and keep it running.
Chapter 7: When a Sole Proprietor Should Avoid It
Chapter 7 bankruptcy may not be the best option for you if your sole proprietorship requires equipment or property to operate your business.
Most states have some exemptions for business property, though the amount can vary widely. The Chapter 7 trustee can sell nonexempt properties. Chapter 7 could mean that you lose your business.
Do I Have the Right to Keep My Business if I File Chapter 13 Bankruptcy?
Filing for Chapter 13 may help you keep your company afloat, but you would need to file individually because only individuals or sole proprietors are eligible for Chapter 13. No filing is allowed for corporations, partnerships, or LLCs.
What Chapter 13 Bankruptcy Can Mean for Business Owners
Because you will be making a monthly payment for three to five years, Chapter 13 is more difficult than Chapter 7. However, Chapter 13’s payment schedule has a positive side. People tend to pay less for obligations they don’t value, and more for credit card balances, medical bills, and personal loans.
Chapter 13 filers, for example, can:
- Save the property by closing down a car, house, or collateralized credit accounts.
- Pay off your bills quickly, including tax debts and domestic support obligations.
- Reduce secured loans by “lien stripping” and/or a “cramdown” to lower the property’s worth.
Despite these benefits, Chapter 13 payment plans can be costly and not everyone is able to afford the required amount. You must repay some debts in full through Chapter 13.
You must also pay your unsecured creditors (those who have bills other than your mortgage, car payments, or other collateralized debt) at least equal or greater than the value of “exempt assets” and property that you cannot protect through your repayment plan.
This chapter is not the same for sole proprietors or other business owners. Below is a summary of the major differences.
Chapter 13 Differences: Sole Proprietors and Business Owners Should Expect
Sole proprietors can list and protect their business assets differently from other business owners in Chapter 13 bankruptcy. They may also include business debt in the Chapter 13 case. These are the details.
- The sole proprietor will list all personal and business assets, but not the company’s assets. Protecting business-related property can be done by sole proprietors using the “tools and the trade” or “wildcard”. However, if you had $150,000 worth of nonexempt construction equipment, you would have to pay creditors $2,500 per year plus any other amounts.
- Other owners of businesses will list any property they have, including the value. Although bankruptcy exemptions are not often available to protect company ownership, a wildcard exemption may be possible. Consider, for example, that your business interest is $150,000. However, you cannot exempt it. For five years, you would pay $2,500 to creditors and any other amounts.
- Sole proprietors can eliminate qualifying personal and business debts.
- Other business owners will include personal debts under Chapter 13, including personal guarantees, but businesses will still be responsible for their obligations.
Both cases present a problem if the value property isn’t covered by an exclusion, which could lead to increased monthly payments that are unaffordable. A bankruptcy attorney who has business experience can assist you in determining the best strategy.
All Businesses in Chapter 11 Bankruptcy
To reorganize debts and keep a business afloat, partnerships, corporations, and LLCs must file a Chapter 11 bankruptcy. A Chapter 11 bankruptcy can also be filed by a sole proprietor.
Chapter 11 bankruptcy works in the same way as Chapter 13 bankruptcy, except that the company retains its assets and pays creditors via a repayment plan. A straight Chapter 11 is more complex than a Chapter 13 bankruptcy. The business must file ongoing operating reports and creditors must approve the plan. This is also prohibitively costly for small businesses.
Small businesses have the option to use Chapter 11, Subchapter V. This is a relatively new bankruptcy restructuring that’s simpler and more affordable than Chapter 13.
Need More Business Bankruptcy Help?
If you’re struggling to keep your business afloat and are considering filing for bankruptcy, it’s important to understand the process and your options. At Bruner Wright, we specialize in helping businesses navigate the complex world of bankruptcy. Our experienced attorneys can guide you through each step of the process, from determining whether bankruptcy is the right choice for your business to filing the necessary paperwork and representing you in court.
Contact Bruner Wright today to schedule a consultation and start taking control of your financial future.
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