Closing the doors of a business you built is emotional and hard, and many of the owners we talk to at Delancey Street never thought they would be in this position. You carry the weight of your employees and your creditors at once. It can be disorienting. And the question that keeps people up at night is a simple one: is there a way out?
For some owners, the answer runs through bankruptcy court. You should consider declaring bankruptcy if your business is failing, or if it is profitable but you can’t pay your bills. The majority of filers fall into the first category. If you’ve personally guaranteed business debt, bankruptcy is an option that can protect you from being personally liable for those debts. Many small businesses are unincorporated, making the owner personally responsible for the debt. It’s just you, running your own show, and the business’s debts are your debts. Filing for bankruptcy can take some of that pressure off.
Chapter 13 Bankruptcy
That is where Chapter 13 comes in. Chapter 13 bankruptcy is for people, not for companies. If you’re a sole proprietor, though, you can use a workaround: you can keep your assets while reorganizing your debts and paying all or part of them. The repayment plan lasts three to five years; you make monthly payments to a court-appointed trustee, who then pays your creditors as the plan directs. Along the way, Chapter 13 offers provisions that may help a small business stay in operation. Here are six of them.
The first is the ability to keep the tools you need to work. With Chapter 13 you can keep exempt business property up to a certain value. To qualify, it has to be reasonably necessary to perform your work. Most exemption laws let you pick what you can keep. If the business is part of your livelihood, then so is the gear you use to do it. A plumber can retain a work van and tools; an accountant can retain a computer, software, and a desk.
Second, you can hold on to more than that. It’s also possible to keep non-exempt property while you reorganize, which isn’t allowed in Chapter 7, where the trustee sells it. That means you can keep an asset you might not otherwise be able to protect. Of course, the Chapter 13 debtor does not get to keep the property for free. You will have to pay its value during the 3-5 year repayment period of the plan. The more valuable the gear, stock or fixtures you keep, the more expensive the plan.
Third, it can shrink your unsecured business debt. Sometimes the line between a person and a business blurs. If you file Chapter 13 as a sole proprietor, your business debts become personal debts in your plan.
Fourth, it gives you a way to handle taxes. If you’re the sole owner, you personally owe priority debts like taxes, and they can be paid off through the repayment plan. Instead of facing them all at once, you may be able to spread them out over three to five years.
Fifth, it can cut some secured loans down to size. In a Chapter 13 plan, some secured debts - such as car or equipment loans - may be “crammed down” to the property’s value. If you take that route, you will save on interest and have a lower monthly payment.
Sixth, and most important, the plan has an end. If you finish the plan, you’re freed from the qualifying debt. That’s a big deal.
Chapter 11
Why not Chapter 11 instead? Chapter 11 is available to both individuals and entities like corporations, partnerships and LLCs, with no debt limit or income requirement. The catch is that it’s the hardest and most expensive kind of bankruptcy to run. That’s why it’s mostly used by businesses, not by individuals. It’s important to know the types of bankruptcy available and how each could impact your business before filing.
Business Debt Settlement Company
That is also where we come in. Delancey Street is a business debt settlement company. We negotiate with MCA funders and lenders to settle their claims for less than the total balance. We are not a law firm. When it is in the owner’s best interest to file bankruptcy we will refer them to an independent bankruptcy attorney. We offer a free, confidential first consultation. We will tell you on the first call if we are not the best option. Either way, you must decide whether bankruptcy will solve the problems you want it to.
