Whether you are an individual, small business or major corporation, you can seek protection from the courts from lawsuits, judgments and collection activities under the bankruptcy laws. For businesses that want to remain in operation or for individuals for whom a Chapter 7 is not a reasonable option, there are alternatives to filing a Chapter 7, which is a liquidation of debt and a dissolution of a business enterprise.
A Chapter 13 bankruptcy is for debtors who either do not qualify for a Chapter 7 proceeding because their monthly income is above the filing state’s median or who do not meet the “means test,” or for small business owners who wish to continue doing business. Individuals who file are required to complete a credit counseling class first.Only individuals, self-employed persons or unincorporated business entities may use a Chapter 13. This proceeding enables the debtor to pay off all or a portion of the debts owed so long as the unsecured debt is less than $383,175 and the secured debt in less than $1,149,525. These figures are periodically adjusted upwards.
Debtors are required to list all creditors and their claims, the source and amount of all revenues, a list of all property and of their monthly expenditures. For individuals or business owners with home mortgages facing foreclosure, a Chapter 13 automatically stays the foreclosure process and allows the debtors to make up the arrearages over a reasonable time not to exceed 5 years so long as they can continue making the current monthly payments. The automatic stay also applies to any other attempts to collect on a judgment or to initiate a lawsuit, unless the creditor can demonstrate irreparable damage to their collateral.
Repayment plans can be for 3 or 5 years, depending on certain factors. Once the repayment plan is approved, the debtor makes a single monthly payment to the trustee, which can be made through payroll deductions. No new debt may be incurred without the trustee’s consent.
An individual or any type of business entity may file under Chapter 11, though this is generally used by large corporations or LLCs since it can be complex and quite expensive. Small businesses, though, may qualify to use certain provisions that can expedite the process and make it less costly, A filing under Chapter 11 is referred to as a reorganization and the debtor is known as the “debtor in possession.” As with a Chapter 7 or 13, the debtor in possession files a disclosure statement concerning the business assets, liabilities and affairs, though a small business entity may not have to file such a document if the court sees that enough information is already included in the plan.
Creditors and their claims are categorized; those who are considered “impaired” may be paid less than their claims’ full value. In larger cases, a creditors’ committee is appointed with its own attorneys, paid by the debtor in possession, who can approve or disapprove of the plan submitted by the debtor in possession, submit their own plan, or have a plan “crammed” down.
A debtor in possession has a fiduciary obligation and must submit operating reports and meet certain obligations while being monitored by the US trustee. In smaller cases, the debtor company must submit certain reports demonstrating the business’ profitability, that taxes are being paid and that it is complying with all the rules of the Bankruptcy Code and other rules of procedure.
Should the business not show profitability or if it does not comply with all reporting requirements, the trustee may seek to have the case dismissed or converted to a Chapter 7.
Other than bankruptcy, a business may seek to continue its business operations by working with willing creditors. Debtors should draft a plan to demonstrate that they have existing future cash flow or will be able to secure financing or an infusion of capital. Your plan should show that your business will be able to generate enough cash to pay off outstanding debt over a reasonable time and to give potential investors a return. Financial experts should be used to prepare these projections.
In any situation where your business is struggling, consult with a bankruptcy attorney who has had experience in business reorganizations and who can properly advise you on what path to take and what you can expect. In some cases, your attorney may refer you to certain financial advisors who specialize in turning around businesses without the need to file bankruptcy.