Just as most people will face ups and downs with their personal finances, the same is true for most businesses. In certain circumstances, businesses might benefit from filing for bankruptcy in the same way that an individual might. Filing for bankruptcy is often a valuable tool for reorganizing debt and keeping creditors at bay while the business works to regain its financial footing.
While both individuals and companies can file for bankruptcy, there are different steps involved and the stakes are often higher for businesses. You’ll want help from an attorney with specific experience guiding business owners through the bankruptcy process.
If you own a business and are considering filing for bankruptcy, the bankruptcy attorneys at Loan Lawyers can provide the guidance you’re looking for. We have more than a decade of experience helping people and businesses in Florida with bankruptcy filings, debt defense, foreclosure cases, and related issues. We’re proud to have helped thousands of people and businesses find their way back to a firmer financial footing. Their success stories are the reason we fight so hard for our clients.
Get a free case review today by calling our office in Fort Lauderdale or by filling out our contact form. We can discuss your particular circumstances and whether any of the following bankruptcy options are right for you.
Chapter 13: Adjustment of Debts for Individuals with Regular Income
Chapter 13 is typically used by individuals and not businesses, but there are businesses that may qualify for this type of bankruptcy filing. In particular, Chapter 13 bankruptcy is available for sole proprietorships because sole proprietorships are legally indistinguishable from their owners.
As is the case with personal bankruptcies, a business typically files for Chapter 13 bankruptcy instead of using some other method because the goal is a reorganization, not the liquidation of any remaining assets. Your business will file a repayment plan with your local bankruptcy court outlining how you will pay back your creditors. The amount you will be required to pay back under your repayment plan will depend on how much income you’re making, how much money you owe, and what other assets you have available.
An advantage of Chapter 13 bankruptcy is that you might be able to keep your business operational during the process. You have up to five years to pay off your debt, which can give you additional time to regain your financial footing.
Another advantage of Chapter 13 bankruptcy compared to other types of bankruptcy is that there are more asset exemptions available, allowing you to potentially hold on to more of your property. This can be quite attractive if you’re the sole proprietor of a business, as it makes it easier to do things like keep your house and your car when you file for bankruptcy.
However, if your sole proprietorship requires you to keep a lot of items, products, or equipment on hand, it can be difficult to pay for all those goods while still meeting the terms of your debt repayment plan. And missing just one payment can force you to start the whole process all over, along with having to potentially pay additional penalties and interest. For this reason, think carefully about filing for Chapter 13 bankruptcy if your business is eligible to do so.
Chapter 7: Liquidation Business Bankruptcy
It’s more common for businesses to file for bankruptcy under Chapter 7 than under Chapter 13, but it’s still fairly rare. This is because a Chapter 7 Bankruptcy, also known as liquidation bankruptcy, requires you to sell most of your assets to pay back your creditors. You will also likely be forced to close your business if you file for Chapter 7 bankruptcy.
A Chapter 7 bankruptcy filing for a business is fairly similar to a Chapter 7 filing for an individual or household. Once your business files for bankruptcy, the bankruptcy court will issue an automatic stay barring your creditors from taking any further action against you. You will then need to sell your non-exempt assets (“liquidate” is the official legal term), then use that money to pay back your creditors to the best of your ability. You can keep assets that are in the bankruptcy code’s list of exemptions.
After you’ve liquidated your non-exempt assets and repaid your creditors, the bankruptcy court will discharge your debts. However, as a Chapter 7 bankruptcy generally requires you to shutter your business in exchange for wiping out your debts, this will be the end of the road for your business. The exception is for sole proprietorships, as long as certain conditions are met.
While a Chapter 7 bankruptcy can be a viable option for some businesses, especially sole proprietorships, there are some potential risks if you choose to go this route. If you’re going to be forced to close your business down anyway by filing for Chapter 7 bankruptcy, you can probably do that on your own and avoid the court costs, attorney’s fees, and other expenses that come with the bankruptcy process. Business owners can also often get better prices for their assets than if those same assets were sold by the bankruptcy trustee. Finally, if your business is a partnership, filing for Chapter 7 bankruptcy may end up putting the personal assets of the various partners at risk of liquidation.
Chapter 11: Business Reorganization
By far the most common method businesses use to file for bankruptcy protection is Chapter 11. In fact, most businesses that are not sole proprietorships are required to use Chapter 11 instead of Chapter 7 or Chapter 13.
Like Chapter 13 bankruptcy cases, filing for bankruptcy under Chapter 11 allows businesses to reorganize their debts and come up with a payment plan instead of simply liquidating whatever assets they have left. This gives the business a chance to restructure and find a way back to profitability without having to fully shut down.
When a business files for Chapter 11 bankruptcy, the bankruptcy court will automatically block their creditors from taking any further legal action against the debtor as the business owners figure out the best way forward. The court will appoint a trustee to oversee the bankruptcy while the owners maintain day-to-day control over it.
The debtor must submit a highly-detailed three- to five-year repayment plan to the bankruptcy court and their creditors. As part of a repayment plan, a business can sell some of its assets, terminate existing leases and contracts, and take other steps to partially pay back their creditors. If the plan is approved and the business makes all of its payments, their remaining debts will be discharged.
One of the major hurdles when it comes to filing for Chapter 11 bankruptcy is the time and expense involved. The process can take years to complete. There are many steps and fees along the way. If your business does not have considerable assets, the costs of going through bankruptcy may outweigh the benefits of having some of your debts wiped out.
However, there’s a relatively new option available for smaller businesses that offers many of the same benefits as filing for Chapter 11 bankruptcy. In late 2019, Congress passed the Small Business Reorganization Act, which went into effect in February 2020. Among other things, this law added a new subchapter to Chapter 11 of the federal Bankruptcy Code. This new method of filing for bankruptcy is known as Chapter 11, Subchapter V.
This type of small business bankruptcy is often better suited for businesses with more limited assets. The small business bankruptcy process under subchapter V allows you to pursue reorganization without having a committee of creditors to be appointed or for your creditors to approve your repayment plan. There is also a streamlined process to complete the bankruptcy process. These simplifications cut down on the time and work required to get your reorganization plan approved. Lastly, Subchapter V shortens the whole bankruptcy process by imposing a 90-day deadline to get your repayment plan approved once you file. A shorter bankruptcy process overall means you will save a great deal in attorneys’ fees, court costs, and other expenses.
Contact a Bankruptcy Lawyer Today
There are many options available to businesses facing bankruptcy. Each option comes with its own set of requirements, advantages, and disadvantages. If you’re facing bankruptcy, you can’t afford to make a mistake when you’re trying to figure out how to save your business. Choosing the wrong bankruptcy option or making an error during the filing process could be quite costly.
Fortunately, you don’t have to navigate the bankruptcy process alone. The business bankruptcy attorneys at Loan Lawyers stay up-to-date on all the latest bankruptcy laws and regulations. We have the knowledge and experience to guide you through the process to make it as simple and painless as possible. Call us today or visit our contact page to get a free initial consultation.