How Filing Bankruptcy Affects Your Business
How Filing Bankruptcy Affects Your Business
Are you struggling to pay business debts? Are you feeling the weight and stress of what feels like an endless amount of debt crushing you? Is your business failing to produce enough income to cover expenses? Could your business really benefit from being reorganized? If you are a business owner, filing bankruptcy probably is one of the last things you want to consider. Yet, according to the Small Business Administration (SBA) more than 50% of businesses fail within the first ten years. Unfortunately, filing business bankruptcy is something many business owners need to consider. Filing bankruptcy does not mean the death of your business. Actually, filing either Chapter 11 or Chapter 13 bankruptcy allows you to save your business by reorganizing your debt. Filing bankruptcy can bring much needed relief from financial stress and provide a way for you to give your business a fresh, financial start.
Filing bankruptcy is not something that should be taken lightly. It can affect your credit score and future access to funding. However, if business debt is continuing to build up with no end in sight, you owe it to yourself to review your bankruptcy options and the relief filing bankruptcy can bring.
If you are being forced to consider bankruptcy or know it is time, you probably have a lot of questions, including what type of bankruptcy should you file. Depending on the chapter of bankruptcy filed, filing business bankruptcy helps business owners eliminate or reduce and payback business debts. Keep reading for additional information on the different types of bankruptcy businesses can file and how each type affects the business itself.
What type of bankruptcy should I file: Chapter 7, Chapter 11, or Chapter 13?
Business owners can file Chapter 7, Chapter 11, or Chapter 13 business bankruptcy. Which chapter of bankruptcy business owners file will depend on what type of company you have, the business’ financial situation, and intended outcome from filing bankruptcy. You have options. Filing bankruptcy does not mean the death of your business. Both Chapter 11 and Chapter 13 bankruptcy provide ways to reorganize your business debt, while keeping your company viable. Filing bankruptcy can provide a way to provide you and your business a fresh, financial start.
Regardless of what type of bankruptcy you are considering filing, you do not have to face these decisions alone. And, you shouldn’t! Having an experienced bankruptcy attorney to help you negotiate the forms, decisions, and court procedure is key to making informed decisions that will result in reducing your stress and providing you a fresh, financial start.
Chapter 7 Bankruptcy (Liquidation)
Chapter 7 Bankruptcy is known as “liquidation” bankruptcy. It is one of the most common types of bankruptcy and makes up about 80% of bankruptcy filings. If you are unable to pay your business debts, Chapter 7 Bankruptcy liquidates the business holdings and dissolves the business leading to its ultimate closure. Chapter 7 Bankruptcy is available regardless of the type of company you own.
When a company files Chapter 7 bankruptcy, the company shuts down. Typically, officers, directors, and employees are dismissed immediately. The bankruptcy court appoints a trustee, who is responsible for overseeing the liquidation of the company for the benefit of the existing creditors. If the trustee does allow the company to continue operating, it is usually for a brief period to help protect the company’s assets and assist in the liquidation. Most of the time, companies shut down as soon as they file Chapter 7 bankruptcy.
To file Chapter 7 bankruptcy, the business’ income will need to be low enough for the business to qualify — known as the bankruptcy “means test.” The “means test” is implemented to stop well-funded businesses from abusing the bankruptcy system by filing Chapter 7 bankruptcy and eliminating outstanding debts. The business does not need to be entirely without funding or assets to qualify for Chapter 7 bankruptcy; however, the court will look at additional information to determine eligibility including income and expenses. Furthermore, just because you qualify for Chapter 7 bankruptcy does not mean that liquidating and closing your business is the right decision for you. Businesses that do not pass the “means test” and qualify to file Chapter 7 or do not want to liquidate can use Chapter 11 or Chapter 13 bankruptcy explained in more detail below.
Chapter 11 Bankruptcy (Reorganization)
When a business files Chapter 11 bankruptcy, the court allows it to continue to operate while reorganizing its debts. This helps companies, who are not completely drowning in debt but who will be facing Chapter 7 bankruptcy, if they do not act soon. Chapter 11 with the help of the court helps keep the business viable.
Unlike with Chapter 7 bankruptcy, where a court appointed trustee is placed in control of the business, the business can continue to be managed by its owners and management team with the court approval. Businesses can use the Chapter 13 bankruptcy process to eliminate debt by selling off non-performing assets and bringing in new equity or financing. Reorganizing the company’s debts under Chapter 13 bankruptcy allows the company to emerge the process as a functioning business rather than dissolving, which is required under Chapter 7 bankruptcy.
To qualify for Chapter 11 bankruptcy, the business must be generating regular revenues and must submit a reorganization plan to the court for approval, showing how the company will be able to repay all its outstanding debts. The remarkable thing about Chapter 11 bankruptcy is it gives businesses a chance to negotiate with their creditors, for example lowering payments by extending the length of the loans. The business will need to demonstrate to the court that through the Chapter 11 reorganization process the company will be able to stay viable and regain profitability within an extended amount of time.
Chapter 13 Bankruptcy (Reorganization)
If you have a small business that is drowning in debt, filing Chapter 13 bankruptcy can provide a less costly way to reorganize the businesses debts and save the business from liquidation. Typically, Chapter 13 bankruptcy is used by consumers; however, businesses, structured as sole proprietorships, can use Chapter 13 to reorganize personal and business debt as well. Businesses will qualify for Chapter 13 bankruptcy only if they have a few creditors. Currently for 2017 and 2018, to qualify, the business’ unsecured debts cannot be more than $394,725 and secured debts cannot be more than $1,184,200. If your debts are more than the set limit, you have other options. You can either file for Chapter 11 bankruptcy and reorganize your business debt through that process or you can file for Chapter 7 bankruptcy and eliminate the business debt by dissolving the company. Unsecured debts include credit card debts, unsecured loans, medical expenses, unsecured tax debt, and any other debts not secured by collateral. The secured debt limit includes the total of all debts, including taxes, secured by personal or real property. These debt limits are adjusted every three years to reflect inflation by the Judicial Conference of the United States in compliance with 11 U.S.C. § 104. The next Chapter 13 debt limit adjustment will be made on April 1, 2019.
Sole proprietors can use Chapter 13 bankruptcy because they must petition the court under their own name, not the name of the business. Also, this brings both personal and business debts under the court appointed trustee’s influence. The trustee treats the personal and business debts the same. The good news is the business can continue to operate, while reorganizing under Chapter 13.
Similarly, to Chapter 11 bankruptcy, a reorganization plan must be submitted to the court for approval showing how and when you will repay the debts in order to qualify for Chapter 13. The court will take into consideration all of your personal and business expenses, debts, and type of income in determining how much of the debt must be repaid. The court may discharge some of the debt. Under Chapter 13, you are allowed 3 to 5 years to repay the debt. If the court determines that you cannot pay off the debt in 5 years, you will need to file Chapter 7 or 11 bankruptcy. Likewise, if you cannot repay the debts after completing Chapter 13, you may need to file Chapter 7 bankruptcy next. Because of the requirement to repay the debts, it makes Chapter 13 bankruptcy a viable option only for businesses that have smaller amounts of debt and generate enough income to make the payments.
Filing business bankruptcy is not something that should be taken lightly. It should be thought through well, so you understand completely the ramifications. Filing business bankruptcy can provide relief from the financial stresses of the burden of business debt and provide your company with a fresh, financial start. Filing business bankruptcy does not have to be a business’ death sentence unless you want it to be. You have options.
Businesses can file either Chapter 7 bankruptcy to liquidate the business or Chapter 11 bankruptcy to reorganize the business’ debts. Sole proprietors have a third option, which will allow them to streamline the reorganization process by including personal and business debts by filing Chapter 13. Both Chapter 11 and 13 bankruptcies require the business to file a detailed reorganization plan with the court for approval, which includes how and when the creditors will be paid.
If you feel burdened by a massive amount of business debt or are concerned your business is failing, you owe it to yourself to review your bankruptcy options and what they could mean for your business situation. Filing bankruptcy can be used as a strategic tool to make sure your business is viable for years to come. If you are considering filing bankruptcy for your business or want to weigh your options, schedule an appointment for a free consultation with Trezza and Associates today. Stephen will review your options and how filing bankruptcy will affect your business.