The Benefits of Small Business Bankruptcy
In this economy, as a corporate business attorney, I am seeing a steady increase in the number of small business clients that are struggling to juggle a significant amount of debt. While there are some individuals that cringe at the thought of filing bankruptcy, under the right circumstances, bankruptcy can help you reorganize your debts to save your business, wipe out your personal liability for those business debts, or simply liquidate the company leaving you debt free. The legislative intent of the federal bankruptcy code is to promote entrepreneurial business ventures while providing legal remedies if those ventures falter. It is not news that large corporations, advised by a bevy of attorneys, have utilized the federal bankruptcy code for years.Look at Donald Trump. Cutting your losses and having a fresh start makes good business sense.
Depending on your business goals, this can be accomplished by filing a personal bankruptcy, business bankruptcy, or both.
Who Is Liable for Business Debts?If you are a sole proprietor or a general partner of a partnership, you are personally liable for the obligations of your company. This means that if the business does not pay its debts, creditors may be able to take your personal assets to satisfy those debts. The majority of my small business clients are operating under a type of corporate formation, for both tax and liability benefits.
If you are a limited partner or your business is a corporation or limited liability company, you are usually not personally responsible for those business debts. Your creditors can only go after business assets to satisfy those debts, taking your personal assets, like your home, right out of the mix. However, you may still be liable for those business debts if you cosigned or personally guaranteed the debt.
What Are My Bankruptcy Options?Chapter 7, 11, and 13 bankruptcies each offer certain benefits and also certain drawbacks to the small business owner. Determining which chapter is right for you depends solely on your type and amount of debt and how your business is legally formed under the State of Maine.
Chapter 7 BankruptcyUnder the federal bankruptcy code, a Chapter 7 bankruptcy filing can be utilized by both individuals and business entities alike.
Chapter 7 Bankruptcy for a Business EntityIf you have a partnership, corporation, or a limited liability company, you can file a Chapter 7 bankruptcy on behalf of your business. Under these circumstances, a Chapter 7 filing is used primarily to close and liquidate a business' assets. The business does not receive a discharge and cannot use Maine statutory exemptions.
When the case is filed, a bankruptcy trustee is appointed to sell the business' assets and distribute the proceeds to the business' creditors. It is usually an attractive option for small business owners who wish to close their business and do not want to deal with selling assets and negotiating with their creditors. However, a Chapter 7 business bankruptcy does not eliminate any personal obligations on any business debts.
Personal Chapter 7 BankruptcyIf you are a sole proprietor then your business cannot file Chapter 7 bankruptcy on its own. A sole proprietorship is not a separate legal entity from its owner. All business assets and debts are also the debts of the individual business owner. As a result, you must file a personal bankruptcy to get rid of business debts. The benefit of this is you can wipe out both personal and business debts while using exemptions to protect business assets. This means you may be able to continue operating the business even after bankruptcy.
Also, if you were on the hook for the debts of your partnership, corporation, or limited liability company, a personal Chapter 7 can wipe out your personal liability for business debts. As a result, many small business owners who file a Chapter 7 business bankruptcy also file personally as well.
Chapter 13 Bankruptcy
You Cannot File Chapter 13 for a Business EntityYou can only file a Chapter 13 bankruptcy if you are an individual. A business cannot file Chapter 13 as a separate entity.As we mentioned, a business entity cannot file a Chapter 13. However, if you are a sole proprietor, you and your business are considered the same entity. So if you file a Chapter 13 all business debts are automatically included in the bankruptcy. Chapter 13 is designed to let you keep all property and reorganize your debts through a repayment plan so it is a good choice for sole proprietors with a lot of assets.
Personal Bankruptcy Under Chapter 13In addition to being used by sole proprietors, Chapter 13 bankruptcy allows other small business owners to discharge their personal liability for business debts. A Chapter 13 is usually used by small business owners with a lot of personal assets or who don’t qualify for a Chapter 7.
Chapter 11 BankruptcyBoth individuals and businesses can file Chapter 11 bankruptcy but it is significantly more complicated than both Chapters 7 and 13.
Chapter 11 for Business EntitiesChapter 11 is known as the business reorganization bankruptcy. It is used by businesses who wish to continue operating while reorganizing their debts through a repayment plan. Generally, it is a lot more expensive and complex compared to a personal Chapter 13 reorganization and has additional requirements such as filing ongoing operating reports and the appointment of a creditors’ committee. Further, creditors must usually vote on and approve a plan before it can be confirmed.
However, if your business has less than $2,343,300 worth of debt, it can be classified as a “small business debtor.” The small business Chapter 11 usually proceeds more quickly because a creditors’ committee is not required and there are fewer hearings.