Why File For Business Bankruptcy
A good way to figure out if bankruptcy makes sense is to assess your financial situation. This involves some self-reflection and asking yourself key questions about your business, such as:
Are you only making minimum payments on your credit cards?
Are you using credit cards to pay for necessities?
Are you thinking about debt consolidation?
Are you uncertain of how much money you owe?
Are collections agencies calling you?
Answering yes to just one of these is an issue, but not one to be solved with bankruptcy. If, however, youve answered yes to several of these questions, then you may want to consider filing for bankruptcy as an option.
Perhaps the biggest benefit to filing for bankruptcy is the sense of relief, or clean slate, that the debtors feel afterward. Declaring bankruptcy is a scary prospect, but it can be a necessary and good solution if your finances are in such bad shape. Bankruptcy laws exist in the U.S. both to assure creditors but also to enable debtors to admit they cant do it alone and seek help without completely destroying their livelihoods.
Orange County Lawyers Discuss Small Business Bankruptcy In New York
There are many bankruptcy-related options available to a financially troubled Small Business. Figuring out which option is best is the Million Dollar Question that usually requires an analysis of many factors. The bankruptcy relief available to the Small Business is initially determined by the nature of the business entity. Only a Sole Proprietorship is eligible for a Discharge under Chapter 7, Chapter 11 and Chapter 13. Neither Corporations, Partnerships nor Limited Liability Companies are authorized to file a case under Chapter 13. Each can file a case under Chapter 7, thereby obtaining the benefits of the automatic stay, but none are eligible to receive a Chapter 7 Discharge. Every business entity is eligible to file under Chapter 11 and obtain a Chapter 11 Discharge.
For most Small Businesses in dire financial straits the threshold question should be: Do we try to reorganize the business under Chapter 11?OR Do we file a Chapter 7 Bankruptcy?
Any Small Business contemplating a Chapter 11 Reorganization should consider the following questions:
If you do not know the answer to the first question, or if the answer to the second question is No, then Chapter 11 Reorganization is probably not for you. While not universally true, there are a few problems from which a Small Business has little hope of recovery, as follows:
Talk To At Least Three Bankruptcy Attorneys
Once youve calmed down, you want to know your options and you also want to know which bankruptcy attorney you could work with.
But dont stick with the first one you come across. Talk to about three.
Ones going to have no customer service, another is going to be very friendly, and the other is going to be your best friend, Rhode said.
Educating yourself is the most important thing you can do right now, according to Rhode. Talking to an attorney can help you decide which type you may file and what the future of your business looks like.
You dont need to file that day, or that week, or that month. Its just about getting answers to some of your biggest questions and preparing for the worst, Rhode said.
The biggest enemy that any small business has right now is not the creditor Its not the cash flow its not the bank account, Rhode said. The sole enemy is making poor decisions without information.
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Types Of Bankruptcies For Business
There are three main bankruptcy filing options available for businesses: Chapter 7, Chapter 11, and Chapter 13. Chapter 7 uses liquidation while Chapters 11 and 13 use reorganization.
So, what is liquidation? What is reorganization?
- Liquidation: During liquidation, the business closes and its assets are divided among creditors.
- Reorganization: Reorganization involves the restatement of assets and liabilities to extend the life of the company. New arrangements are made to pay creditors, and the business continues to operate.
The type of bankruptcy you choose depends on whether you want to liquidate or reorganize your business and what entity you have.
Postconfirmation Modification Of The Plan
At any time after confirmation and before “substantial consummation” of a plan, the proponent of a plan may modify the plan if the modified plan would meet certain Bankruptcy Code requirements. 11 U.S.C. § 1127, 1193. This should be distinguished from preconfirmation modification of the plan. A modified postconfirmation plan does not automatically become the plan. A modified postconfirmation plan in a chapter 11 case becomes the plan only “if circumstances warrant such modification” and the court, after notice and hearing, confirms the plan as modified. If the debtor is an individual, the plan may be modified postconfirmation upon the request of the debtor, the trustee, the U.S. trustee, or the holder of an allowed unsecured claim to make adjustments to payments due under the plan. 11 U.S.C. § 1127.
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File The Petition For Bankruptcy
With the help of your attorney, or on your own, you can file the petition for bankruptcy. You will need to fill out many bankruptcy forms and documents. These include schedules, an inventory of assets and other financial information. When submit the petition to bankruptcy court, the filing has been done. Now, you are ready to proceed with the bankruptcy process for your small business.
How Long Does The Bankruptcy Process Take
When it comes down to it, these steps only illustrate an overview of how to file bankruptcy as a small business.
Overall, the entire bankruptcy process can take a long time and cost you a significant amount of moneyâwhich is why working with a business attorney is so important. A Chapter 7 bankruptcy usually winds up with a discharge within four to six months. A Chapter 13 bankruptcy takes a similar amount of time, although the actual period for paying back the debt is three to five years.
Business bankruptcy Chapter 11 takes the longest amount of time. Creditors are allowed to question the debtor in court, and both creditors and the court need to review and approve the reorganization plan. All told, this can take upward of a year.
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Filing For Chapter 7 Bankruptcy As A Sole Proprietor
A sole proprietor typically uses Chapter 7 after a business closure . The benefit to the filer can be substantial because Chapter 7 will discharge both qualifying business and personal debts, thereby genuinely giving the debtor a fresh start. Unlike a Chapter 11 or 13 filing, Chapter 7 doesn’t require creditor repayment. And it’s fast, taking three to four months to complete.
The downside is that all business and personal property become part of the bankruptcy estate. But you won’t lose everything. Bankruptcy law allows you to keep “exempt” assets in Chapter 7, such as some equity in a home and car, household goods, a retirement account, clothing, and a small amount of the equipment needed in your profession. The Chapter 7 bankruptcy trustee sells assets that aren’t protected by an exemption and distributes the proceeds to creditors.
The downside? A filer with a sizable estate could lose property in Chapter 7including the actual business if it’s a company with valuable assets and the trustee was able to find a willing buyer. So if you own an attractive ongoing operation that you can’t protect , you could lose it in Chapter 7.
Important Tip: Keeping a Service-Only Business in Chapter 7
Business Bankruptcy: Additional Tips
As you can see, business bankruptcy isnt always a death sentence. But thats no reason to take this decision lightly in any way. Business bankruptcy should only enter the discussion when you have no other possible options for repaying your debts.
Filing for bankruptcy can negatively affect numerous aspects of your life, not just your personal credit or financing eligibility.
For example, once you file bankruptcy forms to the court, your bankruptcy becomes public record. If you are considering filing, get ready to explain your decision to different people time and time again. Its relatively safe to assume that anyone who should know about your bankruptcy will eventually know. This includes competing businesses, employees, family members, and potential employers.
Depending on your desired field, having a bankruptcy on your record can make it very difficult to get a job. You should probably steer clear of the finance industry or any industry with comprehensive employee screening policies, like law enforcement. Rebuilding your reputation and sense of confidence after filing for bankruptcy could be one of the most stringent tests of your career.
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What Kind Of Small Business Do You Have
These days, many people run their own small businesses. Whether you have a sidle hustle or run your shop full-time, youâre an owner. There are a few different ways your business can be set up. The simplest way is to be a sole proprietor. As a sole proprietor, you work alone and you donât file papers with your state. Babysitting, mowing your neighborâs grass, and selling Mary Kay makeup could be different types of sole proprietorships. Sole proprietorships are not separate entities.
Limited Liability Companies are also very common for small business owners. Their owners file papers with their state every year, and pay filing fees. You might also have a C-Corporation or S-Corporation. Each of these is a separate legal entity. With separate business entities, personal assets and business assets are separated.
What Is Required For A Court To Approve A Subchapter V Plan Of Reorganization
Given that you have provided all of the necessary documents and information, the bankruptcy court will examine your reorganization plan to look for one of two main factors:
If one or both of these statements is true of your plan, the court will likely approve it.
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How Chapter 11 Works
A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile, residence, or principal place of business. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. 11 U.S.C. §§ 301, 303. A voluntary petition must adhere to the format of Form B 101 of the Official Forms prescribed by the Judicial Conference of the United States. Unless the court orders otherwise, the debtor also must file with the court:
If the debtor is an individual , there are additional document filing requirements. Such debtors must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling evidence of payment from employers, if any, received 60 days before filing a statement of monthly net income and any anticipated increase in income or expenses after filing and a record of any interest the debtor has in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. A married couple may file a joint petition or individual petitions. 11 U.S.C. § 302.
How Does The New Subchapter 5 Work
Here is the main thing to know: Like all bankruptcies, it has a magic power called the automatic stay. Filing for bankruptcy stops creditors from collecting from you.
It buys you time, Mr. Keach said.
And time is everything. For example, take a restaurant that was having its best year before the pandemic, but then its revenue disappeared. A Subchapter 5 bankruptcy could help the company by halting creditor collections and allowing owners to renegotiate terms.
What it might allow is, with a couple of exceptions, a built-in moratorium on rent, Mr. Keach said. You could propose a plan where you could literally not pay anything toward old debt for four to six months as long as your projections show that you have positive projected income after that.
In exchange, business owners will need to use their net operating income whats left after the usual expenses like rent, payroll, cost of goods to pay creditors for the next three to five years.
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Chapter 11 Vs Chapter 7
First, if you expect your business to remain viable in the long-term but need relief from creditors now, a new option under Chapter 11 may be appropriate. This route allows a firm to remain operational and, generally speaking, renegotiate its debt and repay over a set amount of time, as well as take other steps to return to profitability.
This option is intended to make the bankruptcy process faster and less expensive for small businesses. It eliminates some costs and paperwork requirements, as well as allowing owners to retain their interest in the business, among other differences from typical Chapter 11 cases.
Nevertheless, a Subchapter 5 filing still comes with a hefty price tag: about $10,000 to $50,000, depending on the complexity of the case, said Stuart Gold, managing partner at Gold, Lange & Majoros in Southfield, Michigan. The filing fee itself is $1,717.
Before you get to the point of filing, however, you should consult with a bankruptcy professional to make sure it makes sense.
“You want to make sure you have a viable business that can survive and is in need of relief to warrant the fees,” Gold said.
“Most business owners are concerned primarily with getting out from under their liability for business debt, and that’s better done using a personal Chapter 7 or Chapter 13 filing,” O’Neill said.
Subchapter V: Bankruptcy For Small Businesses
Subchapter V bankruptcy is the newest type of bankruptcy for small businesses. A result of the Small Business Reorganization Act of 2019, this type of bankruptcy became available to small business owners in February of 2020.
As a subsection of Chapter 11 of the bankruptcy code, Subchapter V bankruptcy has many of the same requirements and outcomes, but it is meant to help small business owners get through the St. Louis and Illinois bankruptcy process more quickly and cost them less money.
The end result is a new way to file a small business bankruptcy to discharge your debts while maintaining equity in your business.
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Talk To A Small Business Bankruptcy Attorney
Before you make a move, having the advice of a small business bankruptcy attorney could make all the difference. Call the Law Office of Jack G. Lezman, PLLC today. Youre under no obligation to file and initial consultations are generally free. We can go over your finances, debts, and income and help you decide if Chapter 11 is right for you.
Eliminating Business Debt Through Chapter 13 Bankruptcy
Small business owners can still take advantage of debt relief through Chapter 13. The relief available changes depending on how the small business is held. Regardless of how the business is organized, Chapter 13 filers who are self-employed or own a business will have extra reporting requirements during their bankruptcy plan.
Sole Proprietors and Chapter 13
Sole Proprietors donât separate business and personal debt on their taxes or in their bankruptcy papers. Because of this, the Bankruptcy Code lets owners of sole proprietorships lump both types of debt together. The trustee will divide the monthly plan payments among all the creditors.
Priority debts, like personal and business taxes will be paid first and in full. Secured debts, like vehicles or furniture loans are paid second, followed by all non-priority unsecured debts, like personal and business credit cards and personal medical bills.
Youâll have to treat all the creditors equally, so you wonât be able to favor non-priority unsecured debts for your business over your personal debts. Each creditor in this category must be treated the same. However, when you finally discharge your bankruptcy at the end of your repayment plan, any unpaid portion of the non-priority unsecured debts will be gone. This is true for both your business and your personal debts.
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Chapter : Liquidation Business Bankruptcy
A Chapter 7 bankruptcy is a common form of bankruptcy for individuals who cannot make regular payments towards their debts. Chapter 7 usually requires you to close your business, however, there are exceptions for sole proprietors.
If you are a sole proprietor, youll be filing for personal bankruptcy. You wont necessarily lose everything: each state has a list of exempt property protected from creditors. A bankruptcy trustee will be appointed to sell all of your non-exempt assets to use the cash to pay back as many of your creditors as possible. Once your debts are gone, you can continue to operate your business.
The difference if you are incorporated is that there are no non-exempt assets, so all business assets are liquidated by the bankruptcy trustee and the business is closed. Thus, if you are an incorporated business and plan to keep running your business, Chapter 7 is not for you.
Filing Bankruptcy As A Partnership
Partnerships are formal arrangements between two or more parties for the management and operation of a business. But technically, a partnership does not exist as a separate legal entity it simply describes the association of the partners.
In good times, partners share in the profits. In bankruptcy, they may well share in the obligation to satisfy debts. It all hinges on the structure of the partnership.
The partnership that files for Chapter 7 bankruptcy, whatever the setup, is in for a rough ride, resulting in the loss of investments, lawsuits outside bankruptcy court, and the likely collapse of the partnership itself.
Thinking of trying the Chapter 13 reorganization path? Good luck with getting creditors to accept a long, drawn-out partial repayment plan if some combination of the partners has sufficient personal assets to pay off all the partnerships debts. An alert creditor may attempt to move the case into Chapter 7 to recover all its owed, rather than some reduced portion.
Thats the reason most partnership agreements contain a poison pill clause: The moment one partner files for bankruptcy, the business dies, preventing trustees or creditors from suing other partners to recover debts.
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