Most entrepreneurs don’t go into business expecting it will become overwhelmed by debt. When that does happen, it can be heartbreaking, and the owner of the business will have to decide how to handle the situation.
One of the options to businesses, like individuals, is filing for bankruptcy. There are several types of bankruptcy that could help business owners take control of their debt, and each has specific benefits, drawbacks, and requirements. Here’s some helpful information on filing for business bankruptcy.
As we noted above, bankruptcy is just one option for businesses struggling with debt. And there are several factors to consider before deciding to file for bankruptcy, the first of which is whether it is absolutely necessary. It may be possible for you or your legal counsel to negotiate with your creditors and come to an out-of-court agreement or settlement that gives you time to stay open and pay without a bankruptcy filing.
One drawback to filing for bankruptcy is the lack of privacy. You will be required to open all of your books to the bankruptcy court, and all of the documents your file with the court, along with the information contained therein, becomes part of the public record unless the filing is sealed.
Another consideration is whether you, as the business owner, or any of the other directors or employees have secured, cosigned, or otherwise guaranteed the business’ debts. If so, bankruptcy may not stop debt collection efforts against those guarantors.
Additionally, you must figure out whether you want the business to continue to operate. If you’re OK with ending the business completely, bankruptcy proceedings can liquidate the business’ assets to satisfy its creditors and close the business for good. On the other hand, if you wish to remain open and operating, you must consider whether:
There is no one plan that fits all business, so consider what is best for yours before making a decision.
If you in fact choose to file for bankruptcy, there are different types — referred to by their chapters in the Bankruptcy Code — that apply to specific debt, reorganization, and operation scenarios.
In a Chapter 7 business bankruptcy, the court will liquidate the business’ assets to satisfy its debts. While this type of business bankruptcy might work for some larger businesses, it is usually suited more toward smaller businesses that don’t have an interest in remaining in business.
In most cases, partnerships and closely-held businesses might not do well under filing Chapter 7 bankruptcy because of legal hurdles and other considerations that can complicate an already complex process.
Chapter 11 bankruptcy is one of the most common forms of bankruptcy for businesses. Under this chapter, courts reorganize the business in a way that ensures the creditors of the business will get paid.
This isn’t a quick answer to financial troubles for a business. Instead, it is a long process that requires presenting very detailed financial records and reports to the court. Business owners should know that in Chapter 11 bankruptcies, the creditors must vote to accept the proposed repayment plan. Only after a certain number of creditors accept the plan can the bankruptcy move forward.
The plus sides of this type of bankruptcy are that the business owner gets to maintain control of the business and doesn’t have to shut it down and allow the court to liquidate the assets.
While a Chapter 12 bankruptcy is usually considered a personal bankruptcy, it is reserved only for people who are in business as farmers or fishermen. The requirements to file for a Chapter 12 bankruptcy vary for each industry.
Unlike Chapter 11 or Chapter 7 bankruptcy protections, Chapter 12 allows these seasonal business owners to make payments on their bankruptcy in accordance with their income-bearing months. This can take some of the strain off during the months they are not making money.
Chapter 13 bankruptcy is also used to restructure or reorganize debt and can apply to debtors who are “engaged in business.” This includes self-employed people but not one-person partnerships or corporations. Debtors may not qualify for Chapter 13 bankruptcy unless they have regular income, less than $394,725 unsecured debt, and less than $1,184,200 secured debt.
Like Chapter 11, the debtor may continue to operate their business, proposing a plan that outlines how they’ll repay their personal and business debts. All the debtor’s disposable income must be devoted to repaying creditors for three to five years, and the bankruptcy court will appoint a trustee in a limited capacity to oversee repayment.
Once the debtor completes all required payments under the Chapter 13 plan and meets other bankruptcy court requirements, the court will discharge the debt covered in the repayment plan. One of the advantages to filing under Chapter 13 is that can stop foreclosure proceedings and give the individual time to pay late mortgage payments. But homeowners will still need to make all scheduled mortgage payments during the Chapter 13 plan.
No business owner wants to think of their business going under. The protections that business bankruptcies offer can help business owners who are drowning in business debt, but navigating the eligibility requirements, court proceedings, and possible restructuring are not easy.
Seeking the help of an experienced bankruptcy attorney might help businesses in financial trouble to explore their options for financial relief, regardless of whether the business will remain open or close down.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified business bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local business bankruptcy attorney to discuss your specific legal situation.