If you own a business and are experiencing severe financial difficulties that are threatening its future, you may be contemplating a business bankruptcy. In deciding whether to file a Chapter 11 or a Chapter 7 bankruptcy, the structure of your business is your first consideration followed by whether you want to close your business or keep it operating.
What is Your Business Structure?
A Chapter 11 filing is usually only available for corporations, partnerships and LLCs who wish to continue operating. If you are a sole proprietorship, you can generally only file under Chapter 7 or a Chapter 13, which is a debt reorganization plan.
Filing a Chapter 11
A Chapter 11 is a reorganization of your corporation or partnership’s debts and allows your company to remain operating. You are able to keep your business assets but you pay your creditors through a repayment plan that must be court approved. Your creditors can also object to your repayment plan if they deem it unfavorable or unworkable.
You also have to provide continuing operating reports on the progress of your business to see if the payment plan is having the desired effect of making you a profit and paying your creditors. The court will appoint one or more committees of creditors and stockholders to work with the corporation. A Chapter 11 allows you to manage your existing contracts and obtain financing from new creditors, but the bankruptcy court does have oversight of your operation and must approve all major business decisions. In many cases, companies are able to regain their footing and thrive under Chapter 11.
Filing a Chapter 7
As a sole proprietor, you can file for a business bankruptcy under Chapter 7 if you wish to liquidate your business and wipe out your business and personal debts. Since you are not incorporated, you retain personal liability for your business debts. Generally, exemptions for business assets are limited but since your business assets belong to you, you could avail yourself of them under your state’s exemptions and theoretically continue to operate your business. However, the trustee can seize your accounts receivable as well as other business assets so it is unlikely you would have enough assets to continue operating. An exception is if your business is a personal service company with little to no inventory so that continuing your business is more likely.
You do have to qualify for a Chapter 7, which depends on your business income, just like a consumer debtor. One consideration in filing a Chapter 7, though, is that if you have a great deal of nonexempt assets, the trustee can seize these to pay off your creditors.
Otherwise, if you want to continue to operate, you might consider a business bankruptcy under Chapter 13. Like a Chapter 7, you can include your business and personal debts in your filing. This is a better plan for business owners who have considerable nonexempt assets since you can keep them while paying back your creditors through a 36-month or 60-month plan. For individual business owners who do not qualify for a Chapter 13 because they owe too much money and still wish to remain open, they can file under Chapter 11.
Corporations, LLCs and Partnerships
Corporations, LLCs and partnerships use a Chapter 7 to liquidate and dissolve their businesses. The bankruptcy is filed in the name of the business and the company will have assets and debts that are separate from those of the owners. In case of a partnership, however, the partners’ personal assets may under some circumstances be used to pay off creditors unless they file bankruptcy for personal protection.
Under this filing, the bankruptcy trustee has the option of continuing to operate your business and then selling it as a going concern, if possible; abandoning the business if it has little to no value; liquidating the business and paying off creditors; or just selling the ownership interests. Anyone can purchase the business from the trustee, including the original business owners, if you are the highest bidder.
If you are personally liable for any debt because of a personal guarantee or a creditor has “pierced the corporate veil” and proved your company is not entitled to limited liability, then you are still obligated to pay it unless you file a personal Chapter 7 bankruptcy.