If your business is overwhelmed with debts, bankruptcy can help you manage them, remain in operation, or close the business efficiently. However, a company can file for various types of bankruptcy, depending on its financial situation and debts. A skilled bankruptcy attorney can review your situation to advise and guide you in filing a successful bankruptcy petition with the court.
For example, you can file for Chapter 11 if your small business has enough cash flow and can remain open. Chapter 11 will allow you to make monthly repayments to your creditors as you continue running the business. Alternatively, you can choose Chapter 7 to pay off your debt and close the business transparently. Your attorney can also suggest Chapter 13 bankruptcy under specific circumstances. Here are some of your options if you believe that filing bankruptcy can help your small business debt situation:
Chapter 7 for Sole Proprietors
Running a business has its fair share of ups and downs. Sometimes, a company will perform nicely and elevate your financial situation, but other times, it will suffer a loss. Different conditions affect business people differently. Some businesses survive their low moments, while others end up declaring bankruptcy. If you have overwhelming business debts and have tried other ways to manage those debts with little success, bankruptcy could be right for you. However, speaking to a skilled bankruptcy attorney to weigh your options and make an informed decision is advisable.
If you are in a sole proprietorship, you, the business, and your entire company are typically the same, including all the finances. Your business and personal finances are treated the same, even after filing for bankruptcy. When filing for bankruptcy, the court will require your personal and business financial statements, tax returns, and any other document that could shed light on your financial situation.
Your attorney can recommend Chapter 7 for various reasons, for example, if you plan to close the business after bankruptcy. The benefits of this move will be many, including the fact that bankruptcy will discharge some of your debts, like personal debts, leaving you with only a few to repay. It gives you a fresh beginning in life after trying to remain afloat. Another benefit is that Chapter 7 does not necessarily mandate creditor repayment, which is necessary with Chapters 13 and 11. Chapter 7 is also very fast; the entire process could take four months.
However, you must qualify for Chapter 7 for the court to accept your bankruptcy petition. Additionally, everything you own in person or as a business is included in your bankruptcy estate. Your trustees will use what is in the estate to pay your debts in order of priority.
You could keep some of your property that the court declares exempt from bankruptcy in Chapter 11, including part of your car or home equity. Other exempt properties include clothes and retirement accounts. You will also keep household goods and some equipment to earn a living in your career. However, everything that is not exempt from bankruptcy will be liquidated to pay off your debts.
The disadvantages of filing for Chapter 7 as a sole proprietor are equally many. For example, if you own a large estate, you could lose valuable property after bankruptcy. Everything you have in your business will go into the bankruptcy estate and be used to repay your debt. Once the court determines what you are allowed to keep, the trustee will start looking for buyers for your property. Thus, if you have assets or ventures you cannot protect with Chapter 7, you could lose them once the court grants your petition.
However, servicemen could keep their sole proprietorship after filing for Chapter 7. If you are a dance instructor, freelance writer, handyman, or accountant, you will not lose everything after bankruptcy. Your service and skills cannot be sold to pay your debt. The trustee cannot force you to work to make money for the bankruptcy estate. Additionally, you can keep part of your professional equipment after bankruptcy to continue working. Your trustee can also allow you to work during bankruptcy, provided you have insurance liability coverage.
Your Other Bankruptcy Options as a Sole Proprietor
If you fear losing your business after filing for bankruptcy, your attorney can recommend Chapter 13. You will continue operating your business while repaying your debt. You can also file for Chapter 11 or Subchapter V if you owe more than Chapter 13 allows. This is an excellent option if your business is still making a good profit, which can sustain it and enable you to pay your debt.
You do not surrender your property or assets, as stated in Chapter 7. The trustee restructures your debt and organizes it in the order of priority. Then, they develop a repayment plan with which you will pay your debt within three to five years. You could require more assets or equipment to increase your business's income. That way, you can keep up with the repayment plan and make more to keep your business in operation.
The court will exempt some of your debts in Chapter 13 (or Chapter 11 or Subchapter V). Since you will not be required to pay these debts, you could manage your nonexempt debts with your business profits. However, your remaining creditors will expect full payment by the end of the repayment period. You must also demonstrate to the court that your business makes sufficient profit to fund the repayment plan. Otherwise, you will not qualify for this bankruptcy.
Thus, if you cannot protect the expensive equipment and tools your business needs to run smoothly after bankruptcy and are not making enough profit to cover your debts, you will not qualify for Chapter 13. But if you are on the verge of losing your business and earning enough to pay your debt within three to five years, your attorney can recommend Chapter 13. Your creditors will not take any collection action against you within the repayment period, giving you enough time to organize your finances and pay off your debt.
Chapter 7 for a Small Corporation or Business Partnership
Bankruptcy attorneys rarely advise clients to choose Chapter 7 if they run partnerships or corporations because the disadvantages, in most cases, outweigh the advantages. Your attorney can advise you to consider Chapter 11 instead of Chapter 7.
When it becomes difficult to keep a partnership or corporation open due to overwhelming debts, the stakeholders will advise closing it and then using the business assets to pay off debts. When your business’ assets are substantial or expensive, or your debts are more, it becomes beneficial to liquidate the assets to pay off debts inside the bankruptcy. In this case, you will surrender everything to the bankruptcy trustees except the exempted assets. The trustee will find buyers for your business assets and pay your creditors. This move will also benefit you because the court will free you from some of your obligations.
In that case, Chapter 7 seems to be the best and easiest way to close a failing partnership or corporation. However, the bankruptcy trustee will not involve you in the asset liquidation. That lack of transparency could also raise issues with creditors, especially if they feel the partners withhold business assets before closing it. It could result in additional legal issues that could drag on for a very long time, making it hard for you to move on even after losing the business. If you can avoid these additional litigations, you will save much money on possible legal costs.
Possible Issues You Could Face When Filing for Chapter 7 Bankruptcy for Your Small Partnership or Business Corporation
Before filing for Chapter 7 for your small partnership or corporation, it helps to understand some of the limitations and possible issues you could face. That way, you will be prepared to handle them or seek an alternative way to manage your debts.
For example, debt discharge is unavailable for corporations and partnerships that file for Chapter 7 bankruptcy. Even if you lose your business due to overwhelming debt, you must find a way to repay all your debt. After closing the company, your creditors cannot claim their money from an already-closed business. However, they can file a claim against you or your partner since you are responsible for your business debt.
The main issue with Chapter 7 is that it cannot discharge some of your debts. It will also maintain your responsibility for your business debt. In that case, the trustees can use your assets to raise enough money to pay your business debt. These are reasons why bankruptcy attorneys advise against Chapter 7 for small corporations and partnerships.
The corporate design protects shareholders from liability if a business fails to pay its debt. However, bankruptcy comes with several risks you should be aware of before making the final decision. Once you file for bankruptcy for your small corporation or partnership, your creditors can bring a lawsuit in court for the shareholders to assume responsibility for the business debt. Even though creditors can still get such a lawsuit without a bankruptcy petition, filing for bankruptcy can cause creditors to take legal action to recover their money.
If your business is struggling financially and you need help managing your business debt after closing it, it is advisable to go for Chapter 7 as an individual. This way, you will not be held responsible for your business debt, including personal guarantees. Even though your nonexempt personal assets will be at risk, qualifying for Chapter 7 as an individual will be easy, especially if your business debt is more than yours. Doing this will ensure you qualify for Chapter 7, even if you earn considerably.
The right bankruptcy to file for a business corporation or partnership depends on your individual and business situation. It is best to speak to an experienced bankruptcy attorney to understand your options and make an informed decision with more benefits than setbacks.
Chapter 11 or Subchapter V for Small Corporations or Partnerships
Chapter 13 is an alternative to Chapter 7 if you want to file for bankruptcy for your business. However, it is usually available for sole proprietorships and individuals. Chapter 13 allows you to pay your debt within a predetermined period with a laid-down repayment plan. But, you can consider Chapter 11 if your small corporation or partnership is struggling with debt. It is the bankruptcy option for businesses wanting to pay their debt while still operating. It means that you keep your business.
In the past, businesses seeking debt relief through bankruptcy found Chapter 11 costly. However, this bankruptcy option is slowly gaining popularity because of the relaxed manner in which companies can clear debt while remaining in operation. Chapter 11 allows you to restructure your business debt using similar processes used by individuals who file for Chapter 13. You can list your business debt in order of priority and devise a repayment plan that you can stick to for a predetermined period. This would be your best bankruptcy option if your business still makes a substantial income.
However, allow your bankruptcy attorney to evaluate your finances and advise you on the best bankruptcy option for your business situation. Always weigh the pros and setbacks to make the best decision for your individual and business needs.
Find a Competent Bankruptcy Attorney Near Me
Running a successful business is sometimes a guarantee that you will enjoy good results every financial year. You will make good profits sometimes and struggle other times. The problems come when your business’ debt becomes overwhelming, and the only solution is to close the business or file for bankruptcy. Speaking to a skilled bankruptcy attorney about your opinions before making the final decision is advisable.
At Los Angeles Bankruptcy Attorney, we handle all kinds of bankruptcy cases from businesses, including bankruptcies for sole proprietorships, corporations, and partnerships. Thus, we have the skills and knowledge to discuss your options after reviewing your business finances. We can also guide and help you through all legal processes, protect your rights, and fight with you in court for a favorable outcome. Call us at 424-285-5525 to learn more about bankruptcy options for small businesses in Los Angeles.
