When You Need Small Business Bankruptcy

You and your small business are struggling to make ends meet.  What are your options? I met with busy Philadelphia bankruptcy lawyer David M. Offen to find out what small businesses can do about unmanageable debt.

The two most important considerations for a small business owner considering bankruptcy are:

  • How the business is organized
  • Whether you want to continue business operations or liquidate
Bankruptcy

1. Corporation? LLC? Partnership? Sole Proprietorship?

Each type of bankruptcy filing is available to certain business types. Sole proprietors can file bankruptcy under Chapter 13, but corporations and LLCs can not. All types of business structures can file bankruptcy under Chapter 7 or Chapter 11.

If your business is a sole proprietorship, you are personally on the hook for business debt even if your business files bankruptcy. If your business is a partnership, the same goes for you and your partners. 

Generally, if your business is a corporation or LLC you are not on the hook for business debt.  However, if you offered any personal guarantee for business loans, it does not matter how your business is organized – you are personally liable for that debt. 

2. Continue Operations or Liquidate?

Are you just ready to throw in the towel and liquidate business assets, or do you intend to continue operating your business and just need help reorganizing your debt? And, are you personally liable for any business debt due to the business structure and/or any personal guarantees?

Your answers to these questions, in combination with the types of bankruptcy available to you, will dictate the chapter under which you will file a business bankruptcy petition.

Chapter 7 Bankruptcy for Businesses

What can Chapter 7 bankruptcy do for you and your business? In general, Chapter 7 wipes out unsecured debt.  The assets of the business are sold by the Chapter 7 Trustee and the proceeds pay your creditors, in part, unless the assets are protected by exemptions (see below). Again, if you are personally liable for any business debt for any reason, you remain liable when your business files bankruptcy.

If you have a sole proprietorship, you can personally file a Chapter 7 petition and use federal or state exemptions to protect both your personal assets and your business assets. 

Business Chapter 7 is available to partnerships, LLCs, and corporations, but exemptions do not apply so business assets are unprotected and must be sold to satisfy creditors. Businesses filing Chapter 7 do not continue operating.  

Chapter 13 Bankruptcy for Businesses

You can reorganize your debt in a Chapter 13 filing through your three or five-year plan. Any unpaid unsecured debt remaining at the end of your plan is discharged.

Chapter 13 bankruptcy is only available to sole proprietors because the person and the business are considered the same entity. A sole proprietor might consider using Chapter 13 bankruptcy to retain non-exempt assets, reorganize secured debt, pay off any priority obligations (like taxes), and get both business and personal non-priority, unsecured debts discharged. 

Chapter 11 Bankruptcy

Chapter 11 is only available to businesses and to high-earning individuals.

Chapter 11 for Sole Proprietorships

Both individuals and businesses of all types may file under Chapter 11, but an individual/sole proprietorship will be more likely to file under Chapter 13 unless prohibited.

Chapter 11 for All Other Business Types

Filing under Chapter 11 is the only way a business (other than a sole proprietorship) can continue business operations. Chapter 11 is the type of bankruptcy filed by large businesses, that you’ve probably heard of in the news.

Small businesses follow most of the same rules and procedures as large corporations, but if the business owes less than $2.5 million, there is a “small business debtor” fast track that streamlines the process somewhat.  

Small business or large, Chapter 11 is very complicated. The following is required:

  • The business’ statement of operations; 
  • The business’ most recent balance sheet; 
  • The business’s most recent cash flow statement;
  • The business’s most recent federal tax returns.

The business owners and their attorney develops a reorganization plan showing how the business will treat its debt and recover. After the Chapter 11 reorganization plan is approved by the court, the business then makes monthly payments to creditors under the plan. Who gets paid what is determined by a complicated formula that takes into consideration the type of debt and how much is owed.

Consult with an experienced business bankruptcy attorney in your area if you are considering filing bankruptcy.

About the author:

Veronica

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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