A small business struggling with a heavy debt burden may be able to seek relief by filing for bankruptcy. Depending on the circumstances, a business debtor can file either a Chapter 11 or Chapter 7 petition. A Chapter 11 bankruptcy is designed to allow a business to reorganize its debts and return to profitability. If the future prospects for the business are not good and the debts cannot be reorganized, the alternative is to liquidate the business through a Chapter 7 bankruptcy. In either case, it is essential to engage the services of an experienced business bankruptcy attorney.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is one in which a small business has the opportunity to reorganize its debts while continuing to operate. A small business debtor is one that is engaged in business or other commercial activities and owes no more than $2,490,925 in total claims at the time the bankruptcy petition is filed. A court-appointed trustee will oversee the bankruptcy.
In this form of bankruptcy, the business files a plan for paying its debts over a set period of time and must also propose a plan to return to profitability. In addition, the bankruptcy petition must include a recent balance sheet, statement of operations, cash flow statement and a federal tax return. A plan that is deemed to be fair and equitable by the court will be approved.
While Chapter 11 bankruptcy may enable a small business to restructure its debts, regain profitability and continue to operate, filing Chapter 11 can be a lengthy and expensive process. Moreover, many Chapter 11 bankruptcies are not successful and are ultimately dismissed by the court. If the court determines the business does not have a chance to become profitable, the court will convert the bankruptcy to a Chapter 7 and the business will be liquidated.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is referred to as liquidation and is typically used when the business’ debt is overwhelming and it is unlikely that it will be able to return to profitability. When the petition is filed, an automatic stay goes into effect which stops collection activities by creditors. A trustee is appointed who is responsible for selling the small business debtor’s assets to pay off the creditors.
For a sole proprietor, a Chapter 7 personal bankruptcy can discharge both personal and business debts. If a partnership files a Chapter 7, the business will be liquidated and the assets will be sold; however, any partner who is personally liable for any of the business debt may also need to file for personal bankruptcy. If the business is set up as a Limited Liability Company or Corporation, the debts cannot be discharged, the assets will be sold and the business will cease operating.
There are a number of factors involved in deciding whether a small business should file for bankruptcy, including the type and amount of debt involved, whether or not it wants to continue operating, as well as its prospects for regaining profitability. If you own a small business and are considering bankruptcy, call our firm to discuss the options available to you.