Don’t think of bankruptcy as just for individuals. Businesses can use it too, and so can their owners. An owner can also wipe out personal liability for business debt in a personal bankruptcy. A business bankruptcy is usually more complex than a consumer bankruptcy. Not understanding the difference can easily result in an unexpected and costly outcome. It’s always a good idea to speak with an attorney before moving forward, and in some cases it’s actually required.
Delancey Street is a debt settlement company, not a law firm. We negotiate with merchant cash advance funders and lenders to settle for less than you owe. We don’t sell another loan. If bankruptcy makes more sense - for example, a Subchapter V bankruptcy - we refer the owner to an independent vetted bankruptcy attorney. A local bankruptcy attorney will take the time to go over the entirety of your finances and will be able to tell you how a court in your area is likely to handle your case. These are the eight questions we would want any Ohio owner to ask at that first meeting.
File a Personal or Business Bankruptcy
First, should I file a business bankruptcy or a personal one? You file a personal or business bankruptcy based on your debt. If your debts are mostly consumer debt, you file a personal bankruptcy. If your debts are mostly business debt, you file a business bankruptcy. What’s “mostly”? That depends on the court where you live. Some courts compare how much money you owe in consumer and business debt. Other courts count how many consumer and business debts you have, no matter how much money you owe. You’ll have to follow the local court’s standard.
Second, what actually counts as business debt? Start by sorting your debt into buckets based on what it’s for. Business debt is debt you take on to run or make a profit from your business. Not for stuff like taking your family on vacation. A twist: taking out a home equity loan to open a 24-hour diner is business debt even though it’s backed by your home. Sometimes student loans and income tax debt are considered business debt too, and courts disagree on how to treat that.
Third, do we close the business or try to save it? If your business is likely to shut down, it will probably file for a liquidation bankruptcy under Chapter 7. When a business is on the brink of collapse, it should be shut down in an open way. If it’s not, your creditors could possibly sue you for pilfering assets before you shut it down, which could get very expensive. In Chapter 7, the trustee - the person appointed by the court to administer the case - liquidates the business’s assets and apportions the money to creditors, and the bankruptcy puts a lot of the close-down work into the hands of others. Any business can file Chapter 7, but only a sole proprietor can have qualifying debt discharged.
If you can stay in business after sorting out your debts, reorganization bankruptcy can help you keep the doors open and eventually succeed. Chapter 11 is a procedure to help you renegotiate your debts with creditors and put together an easy-to-manage repayment plan. Any business entity can file Chapter 11 and there is no limit on the amount of debt, but it is most effective for large, established companies; it’s typically too expensive for a small business with a meager income stream to get the approval of creditors and the court. Subchapter V of Chapter 11 is a new tool, essentially a hybrid between Chapters 13 and 11, which was designed to give small businesses a cheaper path to file for Chapter 11; it has been well-received and successfully used.
Type of Business
Fourth, how does my type of business change things? A good lawyer will want to know whether you are a sole proprietorship, a partnership, an LLC or a corporation. For a sole proprietor, you and your business are pretty much the same. You are personally on the hook for everything the business owes. A Chapter 7 bankruptcy eliminates the owner’s liability for both qualifying business and personal debt - including personal guarantees. On the other hand, all your personal assets and the business assets will become part of the bankruptcy estate. The owner is allowed to exempt a certain amount of property. Whether the business will continue really depends on what kind of business it is: a dog walking service might continue, whereas a food truck business would likely be done for after the trustee sold the truck and the equipment.
Among business entities, only a sole proprietorship can use Chapter 13. If your debt isn’t too high, and your business makes enough money to support a repayment plan, you might be able to stay open and repay creditors over three to five years. If your debt’s too high for Chapter 13, you can opt for Chapter 11 or Subchapter V instead.
Fifth, are my personal assets at risk? Partnerships usually only have two choices, Chapter 7 or Chapter 11. They rarely do Chapter 7 because the partners are held responsible for the business debt: the trustee would probably end up taking each partner’s property and selling it to pay the business debt, and the case wouldn’t wipe out the partners’ personal debts either. LLCs and corporations follow the same basic rules, except that the owners’ personal assets usually aren’t on the line. The big “however” is that if a company principal used company assets for non-business purposes, a disgruntled person could sue to pierce the corporate veil. Such allegations are relatively easy to make once in bankruptcy court. All litigation is expensive, one way or the other.
The Amount of Time You Have to Wait
Sixth, have I received a bankruptcy discharge before? If so, you might have to wait before you can get another one. The amount of time you have to wait depends on the type of bankruptcy you filed for previously, and the type you are planning to file now.
- Eight years if you’re going for Chapter 7 after a Chapter 7 or 11 discharge.
- Six years if you’re going for Chapter 7 after a Chapter 12 or 13 discharge (unless the earlier case paid 100% of unsecured debts, or 70% in a good faith plan).
- Four years if you’re going for Chapter 13 after a Chapter 7, 11 or 12 discharge.
- Two years if you’re going for Chapter 13 after a Chapter 13 discharge.
- No wait between Chapter 11 or 12 discharges.
However, if you or the business violated a court order or had another case dismissed in the 180 days before filing, you might not qualify for another discharge (tell your lawyer).
Seventh, can a creditor force my business into bankruptcy? If your business has some valuable stuff and a creditor is worried you won’t pay, they can force you into Chapter 7 or Chapter 11 bankruptcy. But they rarely do this. If your business has fewer than 12 creditors, any one creditor with an undisputed, unsecured debt of the required amount can file; if there are more than 12, three creditors must sign. Most creditors don’t want to team up, since in bankruptcy they share the assets. If you fight the case it goes to court, which is costly, and if the court thinks the creditors filed in bad faith, they have to pay your lawyers’ fees.
Eighth, if I file personally, what happens to my corporation? If you own a corporation and file for personal bankruptcy, you’ll need to list and value your shares. The outcome depends on the type of bankruptcy, the value of the shares, and the exemption laws of the state you live in. If your corporate shares are exempt, nothing will happen to your corporation. If not, and it’s a Chapter 7 bankruptcy, the bankruptcy trustee can sell them. You’d lose your ownership interest, but if the company is worth nothing without you, a buyer may not want the shares anyway and the trustee would probably give up on them. If it’s a Chapter 13, you can keep nonexempt shares, but you’d have to pay creditors the value of the shares over a three- to five-year repayment plan.
The answers will be different for every business, which is exactly why the questions are worth asking. If you are not yet sure bankruptcy is where you belong, talk to us before you decide. The first call is free and confidential, and if there is a better, cheaper solution we’ll tell you on that call.
