A slow winter, the unpredictability of commerce, a losing streak: small business owners in Texas may find it more difficult to pay off their debts. When that happens, bankruptcy starts to look like the obvious move. This overview is meant to start your education on business bankruptcy in Texas. Don’t rely on this information alone before taking action, but it will get you started with this complex topic. At Delancey Street we are a business debt settlement company, not a law firm, and we think any owner under debt pressure should understand the bankruptcy route before deciding anything. Here are six things worth knowing.
Two Forms of Business Bankruptcy
The first is that there are generally two forms of business bankruptcy: Chapter 11 and Chapter 7. Chapter 7 liquidation is about shutting down a company. Chapter 11 reorganization is about restructuring and saving a company. Chapter 11 is a reorganization bankruptcy. Instead of shutting down, the company proposes a plan to restructure and catch up on payments. You come up with a payment plan that is approved by creditors and the court. You keep your assets, and your business keeps operating until the debt is discharged. The problem is that the majority of Chapter 11 cases are not successful, and the bankruptcy court can convert it to a Chapter 7.
Second comes liquidation. Under Chapter 7, a business ceases operations, and its assets are liquidated to pay creditors. It is also referred to as a “straight bankruptcy” or liquidation. It can provide relief when the debt has become insurmountable, and it is worth remembering how owners get there. Poor market conditions, lack of financing, cash flow problems, litigation or landlord issues are just a few reasons why businesses fail. Unfortunately, many business problems are not the fault of the company’s owners or employees.
Chapter 7 Case
Third, know what actually happens in the case. In a Chapter 7, the business does not continue operating. A trustee is appointed to take control of the business’ assets and sell them to pay off as much of the debt as possible. If the business is a sole proprietorship, both the business and the owner’s personal assets can be liquidated. It is also important to note that partnerships and corporations have no exemptions. Secured creditors can repossess the collateral, while the trustee can liquidate all other business assets to pay off as many creditors as possible. Leases, contracts, utility bills, credit cards, loans and overdue accounts are just a few common business debts.
Fourth, and this one surprises people: The business does not receive a discharge. Why? Once everything has been sold, there are no assets left to repay creditors. If you have a personal guarantee, that means you are agreeing to be held personally responsible for repaying the debt if the business defaults. So if you have signed a personal guarantee, which is typical, then you may still owe the remaining balance and must consider filing a personal bankruptcy. That guarantee is where debt settlement can matter. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell another loan.
Fifth, Chapter 7 does have real benefits. If you own a sole proprietorship, business and personal debt can be wiped out in one filing. And once the bankruptcy petition is filed, an automatic stay goes into effect that stops all collection activity. Creditors have to stop calling you, and any lawsuits have to be put on hold. Foreclosures stop too. The catch is that the business you founded will go under. If you do not want your business to cease to exist, Chapter 7 is likely not for you.
Partnerships face a bigger problem. In a partnership, the business debt is not discharged, so partners will be responsible and their personal assets are at risk. That means when your business closes up shop and liquidates its assets, you could still be on the hook for the unpaid debt.
Sixth, if your business is a corporation or LLC, Chapter 7 lets it close in an orderly fashion without risking the owners’ personal assets. However, that protection is not watertight. If business assets were mishandled, a creditor can file an “alter ego” action to pierce the corporate veil and go after your personal assets. In Texas, a Chapter 7 case dissolves an LLC. Its assets are liquidated and distributed to creditors, possibly leaving nothing for members.
Talk to a Bankruptcy Attorney
Before you decide anything, talk to a bankruptcy attorney. This can be a complex process that will affect your life and your business. At Delancey Street, the first consultation is free and confidential. If a cheaper option exists, or if bankruptcy (Subchapter V, for example) is the better path, we will say so on the first call and refer you to a vetted independent attorney. If negotiation makes more sense, our fee is one percentage of the enrolled debt, quoted in writing before any work begins.
