A lot of small businesses didn’t survive the pandemic. Some shut down entirely. Others, unable to plan for the state shutting down, are now facing bankruptcy. If you’re a Texas business owner considering bankruptcy, there are a few things to understand. No two cases are the same, and you might have options. The type of chapter depends on a few factors:
- whether your business is a corporation,
- whether the debt is in your name or the company’s name,
- whether you want to continue the business,
- and whether you can manage it if it were to continue.
With that in mind, here are six things to know.
Sole Proprietorship
The first is that structure decides a lot. If you have a sole proprietorship without an LLC or corporate structure, bankruptcy law considers the business and you to be the same thing. Business creditors can pursue your assets as well as sue you personally.
The second is what Chapter 7 means for that business. Most often, Chapter 7 is called “liquidation” or “straight” bankruptcy. When you file this type of bankruptcy, the business ceases to exist. The bankruptcy trustee will take the non-exempt property of the business, and sell it off. Proceeds will be used to pay back the creditors. One saving grace here is that you can get exemptions in bankruptcy. They vary by state, so check what applies in Texas. The exemptions allow you to keep basic property to have a fresh start, such as some equity in a home, cars, furniture, clothing, and tools of the trade. However, the exemptions for business property are usually small, and you will most likely lose the business in the process.
The third thing is that it isn’t all bad. There are advantages to Chapter 7 for a sole proprietor. If most of your debt is business debt, you don’t have to take the means test to qualify for Chapter 7. All the usual business debt, including money owed to vendors, landlords, suppliers and credit cards, are eliminated. The whole thing is pretty quick, taking only four to six months from filing to discharge.
Fourth, Chapter 13 may let you keep going. Because Chapter 13 works for a sole proprietorship the same as for a person, if you have a regular source of income, you present a plan to pay back what you can afford for three to five years. You give the money to a trustee who then pays the creditors. If you are current at the end of the plan, the remaining balance is canceled, or “discharged,” and you can continue the business free of the court’s supervision. The upside is that your personal and business assets are protected. The downside is that you cannot have too much debt in the first place - no more than $419,275 in “unsecured” debt or more than $1,257,850 in “secured” debt (loans with collateral).
If the Partnership Files Bankruptcy
Fifth, partnerships are messier. A partnership is the formal arrangement under which two or more persons conduct a business together. It is not an entity; the partnership is simply the relationship between partners. The partners share the profits in good times and if the partnership files bankruptcy they may also share in its payment of the bills, depending on the type of partnership. A Chapter 7 filed by any type of partnership will be messy: it will mean loss of their investment, lawsuits outside of bankruptcy court and the possible failure of the partnership. Worse, if it tries to reorganize and some partners have sufficient personal assets to repay all the business debts, there is a high probability that the creditors will not be willing to agree to a partial repayment over several years, and an alert creditor may try to put the partnership in Chapter 7 so that it gets everything it’s owed.
That’s why the ”poison pill” provision exists in most partnership agreements: If one partner files for bankruptcy, the business is dead, so the trustee and creditors can’t sue the other partners for what’s owed. But without that provision, it may be a while before you can determine whether or not the partnership had enough assets to pay off its debts, and whether or not a shortfall exists. In the meantime, the court may curtail the general partners’ ability to transfer personal property, or order the partners to put up bond or provide some other guarantee that the shortfall will be paid.
In a general partnership, the simplest form, partners are personally liable for the debts of the business in a Chapter 7. In a limited partnership, which has both general and limited partners, the general partners are personally liable to the company’s creditors, but the limited partners are only liable for the debts they personally guaranteed. In a limited liability partnership, which not all states allow, you may not be liable for all the partnership’s debts, but you still will owe any that you personally guaranteed.
Limited Liability Company
Sixth, an LLC changes the picture. Operating as a limited liability company (LLC) does put a bit of separation between the business itself and those who operate it. Should an LLC file for Chapter 7, the business assets will be liquidated and the business debts paid. The owners are generally not liable for those debts unless they personally guaranteed them - if they did they may need to file personal bankruptcy to get out from under the liability they guaranteed. A struggling LLC with a viable future can also file for Chapter 11 reorganization. Chapter 11 has in the past been an expensive tool available only to large corporations. But the Small Business Reorganization Act (SBRA), which became effective in February 2020, made Chapter 11 simpler and more streamlined for small businesses. Speak with an attorney to learn more.
Congress’s response to the COVID-19 pandemic already modified certain aspects of the law. For example, the CARES Act, which was enacted on March 27, 2020 increased the maximum amount of debts allowed in newly filed cases from $2,725,625 to $7,500,000 from March 28, 2020 to March 27, 2021. Again, whatever route you choose, bear in mind that there are no “one size fits all” solutions to business challenges. Congress has given us multiple options; there is probably one that will work for you but you must first address the basic questions: structure, who pays the debt, do you want to stay in business, and can you do so profitably.
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.
