There are several reasons why a company or its owner or directors may wish to file for bankruptcy. The type of bankruptcy or chapter in the bankruptcy code under which you may file on behalf of your company depends on your company’s business structure or whether it is a corporation, LLC, partnership or sole proprietorship. In most cases, much of your assets are exempt from seizure under either state or federal law, or either if your state allows you to make a choice.
Once you do file for bankruptcy protection under any chapter, an automatic stay goes into effect immediately. All collection activities, including levies, garnishments or lawsuits must cease.
Corporations are separate legal entities and the officers, managers or owners have limited personal liability for the corporation’s debts so that their own assets are protected if the corporation is sued or if the corporation goes into bankruptcy.
If you are incorporated, you may only file a Chapter 7 or a Chapter 11. Chapter 7 is a liquidation and you would file if you wish to terminate your business operations. Chapter 11 is for corporate entities that wish to continue their business while downsizing, laying off employees, renegotiating contracts and leases and selling off assets in some cases. Under a Chapter 7, you must submit a business plan whereby creditors are paid back over a term of years and generally for less than what they are owed.
If your business entity is a LLC, or limited liability corporation, you may file under Chapter 11 so long as your business is still operating. LLCs differ from other business structures and may be not be treated the same as a corporation since the members’ individual equity holdings may be affected.
Whether you file under Chapter 7 or 11, your assets may be protected if they fall under certain exemptions. In some states, you may only choose the state exemptions rather than the federal ones, while other states allow you to make a choice. If you file on behalf of your corporation, the corporate assets may be protected pursuant to the available exemptions but in some cases, your personal assets may be vulnerable. For instance, where creditors can prove fraudulent practices by the corporation or its officers and directors, or where the corporate leaders failed to separate their own affairs from that of the corporation or to follow corporate formalities, the creditors may be able to “pierce the corporate veil.” Under these circumstances, the owners and managers would be exposed to personal liability.
Although corporate officers, managers or owners could file personal bankruptcy under either a Chapter 7 or a 13 if facing loss of their assets, their assets may not be protected if fraud is proven.
Small Business Bankruptcy
If you are a sole proprietorship, you can also file under Chapter 7 and have your business and personal assets protected under state or federal exemptions provided your state allows you to make a choice. The same is true if you choose a Chapter 13 reorganization, which is a simpler version of a Chapter 11 but where you do have to have to submit an approved repayment plan for either 3 or 5 years. Unsecured creditors are paid back at a fraction of what they are owed, if anything at all.
Again, your personal assets are protected only to the extent allowed by your state or the federal exemptions. For example, in Alabama, your homestead is protected only up to $5,000 in equity, or $10,000 for a joint filing by spouses, and it is limited to a homestead up to 160 acres. Florida and Minnesota have unlimited homestead exemptions subject to certain exceptions, but If you have other real or non-homestead property, it is not exempt and is liable to be seized by the bankruptcy trustee and sold. Other exemptions, which are available under most state exemptions or federal law, will protect your pension, public benefit payments, tools of the trade and personal possessions such as clothing and furniture. A “wild card” or exemption that can be used to exempt any asset up to the available limit, can be used to protect property that might not otherwise be exempt or which can add exempt equity to other property.