At Delancey Street, we talk to business owners every week who face the same worries about this question: “Do I have to shut down my business in bankruptcy?” For many small businesses, the answer is NO! However, there are different types of business bankruptcy, and some require a business to shut down, whereas others allow a company to stay open and work to become stable again over time. But even if you go into bankruptcy, your business will likely still have to repay some debts for years to come. It will be more challenging to get a loan in the future. Bankruptcy is a complex concept, but it’s important to note that it’s not just for the benefit of business owners, but also for the benefit of employees, vendors, and creditors. Three types of bankruptcy allow a business to stay open: Chapter 11, Subchapter V, and Chapter 12. Chapter 7 forces a business to shut down. Those three chapters are the first three ways on our list. The fourth is how you use the plan once you have one, and the fifth is the way out that some owners need even if nobody wants it.
The first and best-known way to stay open is Chapter 11. Chapter 11 is designed to let the business operate while it reorganizes its finances to continue as a viable business. It pauses most collection efforts by creditors, and forces them to work out a plan for paying back the debt. It can even discharge some debts, but in most Chapter 11 cases, the business repays most or all of the debt to creditors, over a period of five to ten years. To file Chapter 11, the business must write out a plan to pay back its debts in a certain order. It will have to pay for a court-appointed committee of creditors, which can propose its own plan. The plan can renegotiate leases and contracts, lower debts (often by paying them back with business assets), and restructure operations so they become profitable. The business must get creditors, and the court, to approve it. To qualify for Chapter 11, the business must have significant assets or a viable plan. It must disclose lots of financial information, and must be able to pay all administrative expenses when the plan begins.
The second way is a newer version of Chapter 11 built for smaller companies. Chapter 11, Subchapter 5, also known as Subchapter V, is a version of Chapter 11 bankruptcy for small and medium-sized companies, introduced in 2020. It was designed as a faster, less expensive, and less legally complex alternative to regular Chapter 11. It eliminates personal disclosures and allows business owners to retain their equity and primary management control. It can be used to challenge or break existing UCC liens, along with reducing or shedding unsecured debt. It can place bankruptcy administrative expenses on a payment plan. The plan must pay the remaining debt over three to five years. Unsecured creditors are paid using disposable income during the period that the plan is in place. Creditors do not have to vote on the plan; the court just has to approve it. It provides the same legal protections as a standard Chapter 11. It is available to businesses with less than $3,024,725 in debt as of August 2024.
If you farm or fish for a living, there is a third option. Chapter 12 of bankruptcy is designed just for the small-farmer and small-fisherman industries. It gives the owner time to reorganize their business’s finances but still allows them to retain their assets. It gives the debtor 90 days to propose a repayment plan covering the next three to five years, working with the creditors and a court-appointed trustee. The repayment plan may specify how much the business needs to pay, based on the current market price of your products and the economy. You can expect creditor meetings where the judge will supervise. And your creditors are automatically “stayed” from collecting during that time. No other kind of business is eligible.
Filing is only the start. The fourth way to keep the business alive is to use the plan well. A plan is a program for how to reorganize business, how to pay the debts and all associated obligations. You must submit it, along with lots of documents, when you file Chapter 11 or 12. The documents are:
- list of assets,
- list of liabilities,
- statement of expenditures,
- list of contracts and leases,
- balance sheets,
- reports showing profits and regular earnings.
Your plan must include how you plan to repay creditors, pay your employees and meet your taxes. When your creditors and the court approve, you implement your plan — liquidate assets, void contracts that have a potential loss or renegotiate other contracts, repay creditors with the profits you earn. Under Subchapter V, only the court has to approve.
Close This Business
The fifth way is the hardest to hear: close this business so you can open the next one. It makes sense when you can’t see a way to make the current business profitable through reorganization. When a business files for Chapter 7, a court-appointed trustee sells its assets and then pays any debts it owes in a specific order. If the business is a restaurant, the trustee may sell the catering vans, the kitchen equipment and the furniture. There is nothing legally preventing an owner from opening a new business with a different name and being back in the same industry. Be careful, though. If a court rules the new business is an extension of the old one, creditors can go after it. In Chapter 7, a sole proprietor’s personal assets are not considered separate from those of the business, so the trustee can sell some of them. Credit score is impacted. A general partner (or a partner who has signed a guarantee) can be held liable. Corporate owners and limited partners aren’t typically personally liable. Creditors may file an adversary proceeding after the original filing, so you could face an expensive lawsuit.
A Filing Fee, as Well as Administrative Fees
None of this is free, and it isn’t simple. There is a filing fee, as well as administrative fees, the amount of which depends upon the type of filing; and in a Chapter 11, there is the cost of the creditors’ committee. You are not required by law to have a lawyer, but it’s generally a good idea. If you can’t afford a lawyer, there might be free or low-cost legal services available. A lawyer can explain whether bankruptcy makes sense; which type of bankruptcy is appropriate; which debts can be reduced or eliminated; whether you are personally liable for the debts; and what personal property you can keep. Tell any debt collector you have a lawyer and the collector is supposed to communicate with the lawyer instead of you.
At Delancey Street, we are a debt settlement company, not a law firm. Our first consultation is free and confidential, and we will send you to a vetted independent bankruptcy attorney if bankruptcy is the better option for you. If we are the right choice for you, our senior advisors will negotiate with your funders and lenders to settle for less than the full balance owed. We will not sell you another loan.
