If your business can no longer pay its bills and bankruptcy is starting to look like the answer, before you make this decision, there are some things you should know.
It’s crucial to understand that many small businesses are effectively an extension of the business owner in many ways. In most cases, the business owner will have personally guaranteed the business debt. As a result, a small business bankruptcy is often actually a personal bankruptcy.
Sole proprietors and single-member LLCs may need to file to keep a business alive. Filing for bankruptcy does not necessarily mean shutting down a business. It can sometimes continue to operate. Most small business bankruptcy cases are filed as a Chapter 7 or Chapter 13 and not under the Small Business Reorganization Act (a Chapter 11 “sub V” case).
There is more analysis to be done when deciding to file small business bankruptcy than when deciding to file a consumer case. Ideally, you should get advice from a bankruptcy attorney who has a business background and experience in both consumer and business bankruptcy.
Before Filing for Bankruptcy
Step one before filing for bankruptcy, if your goal is to continue operating the business, is finding out whether the business can continue to operate. You need to be able to, at least until such time as you can rebuild credit with the important vendors you’ll need to succeed.
The second step before filing for bankruptcy is determining what assets the business owns, and what assets you own personally. It can make a huge difference, because the exemptions that protect your assets don’t protect anything the business owns.
Operate the Business Without Credit
If you are considering Chapter 7, you will have to figure out how you can operate the business without credit. Also, if your business has accounts receivable, you will need to time your filing so that you can preserve the value of your accounts receivable. Most people think you can’t continue to operate a business after you file Chapter 7. With timing, that’s not necessarily true, and you can avoid losses.
For example, if you are a real estate agent and you have a closing scheduled for a future date, after which you will receive a commission check, you should not file before your closing because the check will belong to the trustee. If you wait, and receive and spend the commission check in the right way before filing, you will not lose money to the trustee.
Chapter 13
If you’re thinking Chapter 11 or subchapter V is the only way to file small business bankruptcy, think again. Many small businesses file Chapter 13. To qualify you will need to stay under the debt limitations in 11 USC 109. (The amounts are periodically adjusted.) Legal fees are less in Chapter 13, and the case is easier to administer. You will still need to provide periodic reports to the Chapter 13 trustee, and the trustee will want to see that you are following tax requirements.
It’s still possible to borrow to operate in Chapter 13. If your business needs to borrow money to operate, make sure your bank is OK with you filing before you do so. Many banks are willing to continue to loan money to the business, particularly if the loan is secured. Your credit line may be smaller due to the filing. Small business bankruptcy often means less business credit.
In Chapter 13, you get to keep all your assets. Some of these assets might be at risk in a Chapter 7, because the Chapter 7 trustee might sell tools, fixtures, inventory. In Chapter 13, these items are often assigned a low liquidation value, so that the business can continue using them.
To recap:
- figure out if your goal is to keep operating,
- plan ahead of time to be able to live without credit,
- figure out who owns what,
- time your filing around incoming payments,
- choose the chapter that is appropriate for your situation,
- and get in front of the bank ahead of time.
None of these steps are legal advice and if you are filing small business bankruptcy, you should obtain specific legal advice tailored to your situation from a business bankruptcy lawyer.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
