You’ve tried to stay on top of your business debts, but no matter what you do, they keep growing. Your creditors are calling, and you’re wondering if you should file for bankruptcy. Bankruptcy is not one size fits all. It’s several chapters that operate in completely different ways. And which one is right for you, and what it means for your personal assets, depends on how your business is set up. Here are six things you should know before you make that decision.
Individuals and families are not the only ones to suffer through rough financial times. Small businesses do too. The first thing you need to know is that a business owner thinking about bankruptcy is not stepping into some separate, unfamiliar system. The chapters are mostly the same ones used by individuals and families. Chapter 11 is the one mostly used for businesses.
Second, there are three routes for small businesses to restructure debts or liquidate assets to resolve credit obligations: Chapters 7, 11 and 13. What form of business you own can make a big difference in what your options are. If you are a sole proprietorship, for example, you are personally liable for all your business debts. In that case, pretty much all options are open to you. If you are in a partnership, LLC or corporation, though, a business bankruptcy can still leave your personal assets on the hook. Before you worry about which chapter is best, it helps to know exactly which kind of business you are running. Are you a sole proprietor, in a partnership, an LLC or a corporation? Many owners assume that if they are an LLC or a corporation, they are personally in the clear. They still can risk their personal assets in bankruptcy. For a sole proprietor, business debts are personal debts, giving you more choice but putting you more at risk.
Chapter 7
The third thing is Chapter 7 (also known as liquidation). At first glance, this is probably the “scariest” of the different chapters in that it involves the possibility of a sale of the assets to pay off creditors. It sounds bad, but if the Chapter 7 is filed as an individual, many of your assets are protected and exempt. In Texas your home of almost any value is protected, as are your family cars. Many owners don’t realize this, so when they think of filing for bankruptcy, they think they will lose all their assets.
Fourth, for a Chapter 7 bankruptcy, if the debtor is a partnership, LLC or corporation, there are no exemptions. What that means is if the sale of your business assets is insufficient to cover the total debt owed, you do not get a discharge of the obligations at the conclusion of the bankruptcy. Partners may also be held liable for the debts, and they may have to file their own individual bankruptcies too. The same can be said for an LLC. As for a corporation, it all depends on who signed an obligation for the debts. Those who did may be held individually liable. Here is the take-home message for LLC owners and partners and corporate owners: Look at your debts. If you signed for them personally, they can still follow you after the Chapter 7 has run its course. You may end up needing your own personal bankruptcy filing as well.
Fifth, Chapter 13 is another way of reorganizing your debts and paying them back. It is sometimes called a “wage earner’s plan” because it usually involves an individual who is working and has a regular income. A repayment plan is proposed, based on how much disposable income you have — basically the cash you have left after the necessities of living are covered. Depending on how much you earn, the plan will last three to five years. Any remaining debt is then discharged. A bankruptcy trustee is appointed to oversee the plan. Chapter 13 is only available for sole proprietors, who get to treat business debt as their own personal obligation. Other forms of ownership are excluded. The sole proprietor must have at least some income stream to qualify, even if it is coming out of the business that is in trouble. Ask yourself if you would be comfortable living with the arrangement that Chapter 13 requires.
The sixth thing to know is that Chapter 11 is much like Chapter 13 - the business (and in rare cases an individual) formulates a plan to pay all of its creditors over time. Any type of business can file Chapter 11, from sole proprietor to LLC to partnership to corporation. Same caveat, however - your own personal assets could be fair game if the plan fails or the creditors reject it. One thing that makes Chapter 11 unique is that as the filer, you become known as a “debtor in possession.” That means you continue to operate your company as you pay off your debts. Generally there is no trustee appointed by the bankruptcy court that must approve everything you do. You just have to sell creditors on your plan. If they don’t agree, the court can order you to enhance the plan - or even convert the case to Chapter 7 and liquidate the company. The big appeal of Chapter 11 is that you keep control of your business, but be aware: Everything rides on the creditors accepting your plan.
None of these chapters is appropriate for everyone. The correct choice depends on your business, the income of the company and your personal income, and the amount you could lose personally. Bankruptcy is a significant step in the legal system, so talk to qualified counsel beforehand so you can understand how each chapter applies to your situation.
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.
