Small business owners have several options in Bankruptcy to either stay in business by reorganizing the business finances, or to pursue the closure of the business more gracefully than an abrupt closing of the doors. Some bankruptcy options are available to all businesses, but some are only available to a designated type or size of business. We have been representing small business owners for more than 40 years and are experienced and skilled in guiding the small business owners to the option that provides the maximum benefit.
A quick definition is appropriate here: A “sole proprietor” is an individual who personally owns the assets of the business and operates the business in his or her personal name. The business assets are not owned by a corporation or limited liability company, and the income of the business is reported as personal income on tax returns. Similarly, all of the debt of the business is personal to the owner, similar to the mortgage on a home or contract for the purchase of a car. As a result, if the business requires the protection afforded by a bankruptcy case, the individual’s assets and income will be included also.
If the business owner chooses to close/terminate the business due to an inability to pay debts of the business, the owner is most likely going to consider filing a Chapter 7 bankruptcy to discharge as much debt as possible, including business and personal debt. No repayment of creditors is required of the business owner. This will provide the “fresh start” envisioned by Congress when crafting the various bankruptcy provisions. These cases are relatively fast, resulting in the discharge (relief) of debt within about 4 months.
However, a Chapter 7 bankruptcy may result in the liquidation of one’s home or car, which may be something that the business owner wishes to avoid. Chapter 13 and, if the debt exceeds the limits of Chapter 13, a Chapter 11 filing may be desirable to retain assets if the business owner has regular income at the time the case is filed. (This generally means that the business owner has obtained a new job before deciding to file for bankruptcy.) A business owner with less than $419,275 of unsecured debt and $1,257,850 of secured debt is eligible to file a Chapter 13 case. Even small businesses can easily accumulate sufficient debt, when added to the business owner’s personal debt, to take the total over these Chapter 13 limits.
If the business owner is not eligible for Chapter 13, a Chapter 11 case may provide the relief necessary, especially if the total debt is less that $2,725,625, in which case the business owner would be eligible to file a case using the advantageous and less costly provisions under Subchapter V of Chapter 11. (It should be noted that up until March 20, 2021, the debt limit for a Subchapter V case is $7,500,000.)
Partnerships, corporations, limited liability companies
These entities rarely file a Chapter 7 case because closure of the business is a virtual certainty. And, if the business is already closed, a Chapter 7 case would afford no meaningful relief for the business or its individual owner(s). For these reasons, the owners of a business that seek to remain open will look to a Chapter 11 case to obtain the protection of the Bankruptcy Court while the business is reorganized.
For those businesses that qualify as “Family Farmers” or “Family Fishermen”, Chapter 12 provides the type of relief designed to assist the reorganization of the business. A detailed explanation of how a Chapter 12 case differs from a Chapter 11 is beyond the scope of this article. However, if you have a farming or fishing business, we are experienced and knowledgeable to guide your business through a reorganization under Chapter 12.
Because business entities cannot file for reorganization relief under Chapter 13, these entities need to look to Chapter 11 for protection while reorganizing the finances of the business. Chapter 11 cases are typically very expensive for small businesses, which was the genesis of the Subchapter V reorganization for small businesses with total debt less than $2,725,625. We are skilled in counseling and representing businesses in both standard and Subchapter V Chapter 11 cases.
Business bankruptcies are complex, requiring the skill and experience of a seasoned bankruptcy attorney. With this assistance, many businesses can be successfully reorganized and continue to provide a reasonable level of income for the owners.