If you are a small business owner coping with mountains of debt, you might wonder whether bankruptcy is the best option. Small business bankruptcy is more complex than personal bankruptcy, and the repercussions can be different. It is important to fully understand the different types of small business bankruptcies and the potential ramifications of each option.
Type of Business Structure
The type of business structure you have can help determine which type of bankruptcy is best for you. If you have a sole proprietorship or general partnership, you are personally liable for your business debts. If you are a limited partner or yours is a corporation or LLC (limited liability company), then your personal assets are not at risk. Sole proprietors can file for Chapter 13 bankruptcy, but partnerships, LLCs, and corporations cannot. Chapter 7 and Chapter 11 are available to all types of business structures.
Do you plan to continue your business operations, or do you want to liquidate the company and protect your personal assets in the process? Would you entertain the idea of selling your business and using the proceeds to pay off your debts? Do you want to start another business in the near future? What you plan to do next will help you decide whether bankruptcy is best and, if so, which type of bankruptcy you should file.
Chapter 7 Bankruptcy
Sole proprietors can file for a personal Chapter 7 and use exemptions to protect business assets. Partnerships, LLCs, and corporations can use Chapter 7 bankruptcy to liquidate the company, but do not qualify for exemptions. Chapter 7 bankruptcy wipes out unsecured debts, and allows the business assets to be sold by the bankruptcy trustee. If you are personally liable for business debts, you are not protected by a business Chapter 7. You must file for personal bankruptcy to erase those debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is not available to businesses, but sole proprietors are considered one and the same as their companies. If you are a sole proprietor, you can use Chapter 13 bankruptcy protection to retain your non-exempt assets, renegotiate your secured loans, wipe out both business and personal non-priority debts, and pay off such priority obligations as business and personal taxes. Note that Chapter 13 is a debt restructuring program, and you must develop and execute a repayment plan that lasts 3 to 5 years.
Chapter 11 Bankruptcy
Chapter 11 is available to both individual and business debtors, but is rarely filed by individuals because Chapter 13 is generally a more attractive option. If you want to keep your business running after the bankruptcy, Chapter 11 is the only solution for companies organized as anything other than a sole proprietorship. This is the type of bankruptcy filed by major corporations, and small businesses must follow most of the same rules and procedures. However, if you owe less than $2.5 million dollars, you can file as a “small business debtor,” which fast tracks the bankruptcy and releases you from some of the more onerous provisions.
Still, Chapter 11 bankruptcy is extraordinarily complicated, even for small business debtors. You must develop and have approved by the court a reorganization plan that shows how your business will recover. You must make payments that are determined by a very complex formula, and your company will be subject to strict oversight by a trustee during the repayment period. To file, you must produce your company’s most recent balance sheet, statement of operations, cash flow statement, and federal tax return.
Because of its enormous complexity, Chapter 11 bankruptcy should never be handled on your own. While it is important to seek qualified legal advice regarding any form of small business bankruptcy, Chapter 11 is truly in a league of its own, and the decision to file Chapter 11 is not a small matter.
Whether to file for small business bankruptcy and which type of bankruptcy to file are hugely complicated decisions that should not be undertaken lightly. Depending on the type of business structure you have and your future business goals, your bankruptcy could have far reaching implications. An experienced bankruptcy attorney can help you sort through your options, file all needed documents, and ensure that you do not experience unintended consequences as a result.
If you are ready to take the first steps toward financial freedom, call the Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you every step of the way.