If your business struggles under the weight of past due loans, bankruptcy may be your best choice. Sometimes reorganizing in bankruptcy can give you time to assess your business and pay back some of what you owe. Other times, the debts are simply too large, too old, or too crushing to be paid back. Not every business fits a bankruptcy plan, so it pays to talk to an experienced Texas bankruptcy lawyer. Knowing the types of bankruptcies open to businesses can help you decide.
In Texas, your business has several options for filing bankruptcy, and the differences mean a lot. Which form you need depends on what you need to do, and what kind of business you own. For example, do you want to close the business and start over? The choice may keep you in the business at the same time you work off the debt, but it can also lead to shutting down and starting over in a new business. Choosing the wrong one could cost you time, money, and peace of mind.
Liquidation Bankruptcy
A Chapter 7 bankruptcy is the most common filing in Texas and nationwide. If you are a sole proprietor with both business and personal debts, your Chapter 7 can discharge both kinds of debts. A Chapter 7 discharge can relieve you from:
- Credit card balances
- Utility bills
- Car and vehicle loans
- Business loans
- Unpaid accounts
- Contract-dispute debts
- Unpaid leases
- Lawsuits and judgments
A bankruptcy filing triggers an automatic stay on collection efforts against the debtor. That means all collection efforts by businesses, banks, and individuals must stop.
A Chapter 7 bankruptcy is a liquidation bankruptcy. It means the business is closed and liquidated. The judge appoints a trustee to sell non-exempt business assets, and pay creditors with the proceeds. If you are a sole proprietor, the trustee can also sell your personal property to repay creditors, though exemptions can apply to keep some property safe.
Texas offers among the most generous homestead, car, and other protections in the country. Knowing how to make good use of them is vital to protecting your assets. Only an experienced attorney can maximize your exemptions.
With LLCs, partnerships, or corporations, though, business debts are treated differently. These entities have fewer protections than sole proprietors; the exemptions do not apply. The business is fully liquidated, which means the trustee sells all of its assets. When the assets are sold, then the business is closed and finished. Business debts a shareholder or partner may have guaranteed remain, and often the owner must file a personal Chapter 7 to discharge their obligations.
A Chapter 7 bankruptcy can also free an owner from personal liability from the company’s business debts.
These choices are hard for a lot of people. If business debts weigh heavily on your mind, talk to a Texas bankruptcy attorney with experience. Personal and business debts can overlap. A poor choice can leave you worse off than you started, and still saddled with debts.
Bankruptcy Reorganization
A Chapter 11 is a form of bankruptcy reorganization. It helps struggling businesses restructure their debt, repay creditors over time, and keep operating. The filing triggers an automatic stay, which freezes all collection activity. This stay protects the business while it negotiates a reorganization plan with creditors.
Creditors generally must agree to a plan and the court must approve it. The business has to show the court enough revenue exists to make the plan succeed. Depending on the business, it can take months or years to complete.
A Chapter 11 bankruptcy is complicated, time-consuming, and can be very expensive. Having a seasoned attorney representing your interests in such a process can protect your rights while helping you reach a restructuring agreement. If you can succeed, the process can let the business eliminate much of its debt while keeping its doors open.
A Chapter 11 generally includes no trustee, and the debtor acts as a debtor in possession. The debtor acts as its own trustee under court oversight and has many of a trustee’s powers. If the debtor, officers, or directors are suspected of mismanagement, though, the court can name a trustee.
Sole proprietors wanting to stay in business may benefit from a Chapter 13 bankruptcy. It’s a form of bankruptcy reorganization for individuals with regular income. A Chapter 13 is limited, however: combined personal and business debts must stay under set limits.
For 2021, the limits were:
- Unsecured debt: $419,275
- Secured debt: $1,257,850
The court wants to know there’s enough income to pay on a restructured plan for 3-5 years. Most remaining unsecured debt is discharged at the end of the plan.
Decide Which Fits Your Circumstances Best
Each type has a different impact on a business and on your credit rating. As such, it’s important to talk with a seasoned attorney with experience helping companies through bankruptcy, in order to decide which fits your circumstances best. A Chapter 7 may suit a failing business with no realistic way to repay its debts. It can be a clean slate to begin again, and sole proprietors can keep most property using Texas exemptions. However, a Chapter 7 liquidates the business and closes it, and the credit hit will last a long time.
If you want to stay in business, Chapter 11 or Chapter 13 bankruptcy may be the best option. Both allow you to keep operating while paying reorganized debts, and both can show up on your credit. A bankruptcy attorney can review your finances and go over your options.
As a general rule, whether personal credit is affected depends on whether the filer has personal liability on the debt. A sole proprietor or general partner, for example, will see the bankruptcy on their personal credit for as long as 10 years.
With a corporation, LLC, or LLP, your personal credit usually stays unaffected unless you had a personal guarantee on a debt, or owe certain business taxes. Keep in mind that these debts stay on the business’s credit report for many years. As a result, they can make finding funding a challenge.
Still, not every debt problem means it is time for bankruptcy. Depending on your circumstances, there may be several legal avenues available to you. An attorney may recommend trying some steps before filing for bankruptcy. Selling assets, for example, or settling with creditors, modifying loans or renegotiating contracts might buy time. Cutting spending can too.
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.
