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Small Business Bankruptcy and Relieving Debt

Small Business Bankruptcy and Relieving Debt

Hand holding out credit card. Small business bankruptcy.

Coming to terms with filing for bankruptcy can be an arduous process. Although it’s a last resort for many small companies, it can also be a way to revitalize your business. There are a few different ways to file and selecting the right one for your situation will be the first step in relieving debt. Having a lawyer to walk you through the terms and conditions of each process is a helpful way to navigate the legal waters of filing. As a small business in this situation, there are three forms of bankruptcy to file under.

Chapter 7

Chapter 7 is an option for companies that don’t have the resources to rebuild and continue their business after filing. With this option, a trustee will be appointed and all assets will be sold. Through this process, creditors will be paid back to the extent that funds are collected. Those that are able to file with Chapter 7 are partnerships, limited liability companies and corporations. Individuals who operate and own their own small business may file under Chapter 7 as well.

Filing a small business entity in a Chapter 7 is rarely a good option because the entity’s obligations on debts are not discharged in a Chapter 7 proceeding.  Usually the small business owner or owners file bankruptcy in order to wipe out personal guaranties, and ignore the business and its assets, allowing secured creditors to take possession of their collateral.  If there are assets left in the business after secured creditors are paid either the owners can sell assets to pay unsecured creditors, or the unsecured creditors can take the assets through judicial actions.

Rare instances occur in which a small business could benefit from a Chapter 7 proceeding.  Examples include instances in which an owner of the business must demonstrate to a third party that the business has no real value.  Filing a business Chapter 7 provides a good vehicle to have an independent trustee appointed to either provide evidence of no value, or find value in the company to pay creditors.  The trustee’s motivation is to find assets to administer because trustees are paid based on the dollar amounts administered.  This, along with the federal court oversight lends substantial credibility.

Another instance where a Chapter 7 makes sense for a small business is if the business is insolvent in the sense that it cannot pay its bills as they come due, but is solvent on its balance sheet, and the owner(s) is not interested in liquidating assets, while not being paid.  When it is clear that there is likely net positive value in a business if liquidated, filing bankruptcy may alleviate the business owner’s responsibilities, while enabling him or her to move forward with a new position, new company or into retirement.

Chapter 13

Business entities cannot file Chapter 13, but in the bankruptcy world, attorneys often refer to Chapter 13 business cases.  These are cases in which the debtor is self employed and wants to continue operating his or her business.  These cases often involve tax liability for which the owner is liable in addition to the business.  They also involve substantial additional reporting to the Chapter 13 trustee, who administers the estate’s payments to creditors.  If the business entity is insolvent and wants to restructure its debts, it must file a Chapter 11.

An exception to this the rare instance in which the business is operated as a sole proprietorship, and therefore has no legal existence apart from the individual who files the case.  Since the business and the individual are one in the same (unlike a single member LLC which is a distinct legal entity), filing a Chapter 13 to restructure business and operational debt is effective.

There are debt limits that apply to Chapter 13 proceedings, and reporting requirements can be restrictive at times.

Chapter 11

Chapter 11 is perhaps the most well-known form of bankruptcy on a corporate level. While it is mostly structured for larger business entities, it can be a workable solution for certain small businesses. Most small businesses rarely consider filing for Chapter 11 because of the expense, time and effort needed, and level of complexity that comes with it. However, if you plan to use a bankruptcy option as a means of restructuring and revitalizing your business, it is the only option available for partnerships, corporations, or limited liability companies. This option is also the only available Chapter for individuals and sole proprietors with the intent of reorganizing their company, but who owe over the amounts held under Chapter 13’s eligibility stipulations.

Oppenhuizen Law Firm, PLC has a history of efficiently and effectively using Chapter 11 proceedings to assist small businesses in financial trouble.  When carefully crafted, a Chapter 11 case can be cost effective, but planning must begin early and be thorough.

If your business is struggling or you are struggling with a high level of debt personally or in your business, Oppenhuizen Law is available to walk you through your options. We understand that every situation is unique and we will work to find a unique, tailored solution that fits your needs and fulfills your obligations in the best possible way. If you’re looking for advice, let’s talk.