Small businesses form the backbone of our economy, providing more jobs than the behemoth corporations. At times, though, a small enterprise finds itself in trouble and is unable to pay its creditors or is being forced to scale back operations. For some, bankruptcy protection may be the small business owners’ only viable option if they want to continue their business while reorganizing their debt and business operations or liquidate it without losing personal assets.
For a small businessperson, you have the option of choosing a Chapter 11, 13 or 7. A Chapter 13 is only available to individuals or if your company is not a corporation or LLC since these are considered separate legal entities.
If you wish to remain in business but are having difficulty paying creditors, a Chapter 13 can help your business by paying back creditors over time without fear of lawsuits and continuing collection activities.
In a Chapter 13, your personal and business obligations are included as are all sources of revenue. These include any obligations that you personally guaranteed or cosigned. To qualify, your unsecured debt may not exceed $383,175 and your secured debt must not be more than $1,149,524. Both figures are periodically adjusted according to the consumer price index. Your business or income must also be adequate to meet your obligations under your repayment plan, which can be 3 or 5 years, depending on whether your income is less than or equal to your state’s median income. If it does not exceed the median, your payment plan is no more than 3 years. Your tax obligations must also be current for the past 4 years.
Creditors are listed in order of priority. Priority debts are paid 100%, such as child support, tax debts and wages and commissions owed to employees. Unsecured debts are paid anywhere from zero to 100% depending on the your disposable income, value of nonexempt property and duration of the repayment plan.
You can use this chapter to rid yourself of business debts for which you are personally liable. You do not lose any of your property after filing and no judgements may be entered against you nor may any collection activities begin or continue.
A Chapter 11 bankruptcy is generally for larger entities, corporations and LLCs. It is similar to a Chapter 13 but is more complex and more expensive though there are some special provisions for small business debtors. Like a Chapter 13 or a Chapter 7, all creditor activities to collect debts must cease including levies, repossessions and filing of lawsuits against the business.
A Chapter 11 is for a business that wants to remain operating but needs to restructure. Typically, unsecured creditor committees are created in a Chapter 11 with its own legal teams, retained at the debtor’s expense, to look out for its own interests, to approve or disapprove a repayment or restructuring plan, or submit their own. Many times, a corporation that files under Chapter 11 is taken over or eventually liquidated.
For a small business with debts of no more than $2,490,925, rules apply that can make the process less expensive and faster. For instance, the trustee in a small business case can determine that no creditor’s committee be appointed. There is more oversight by the bankruptcy court and trustee with smaller businesses and the business must submit a current balance sheet, cash flow statements, and its tax returns. Also, the debtor has up to 180 days, instead of the standard 120, to submit a proposed Chapter 11 plan. Also, although most repayment plans are for 3 to 5 years, the court can extend the time.
Under a Chapter 11, the business is restructured, with layoffs and closures of some work sites necessary. It can also sell off assets, find investors or new financing, and reduce obligations or modify them.
Chapter 7 is a liquidation of debts and a dissolution of your business though you do retain exempt personal assets.This option is for failed small businesses but which protects the business owner from personal liability since all debts and assets of the business are also those of the owner or sole proprietor unless the business is incorporated or a LLC. These include equipment, machinery or tools. Once debts are discharged, the creditor cannot seek payment from the owner or the business.
If your business is seeking Chapter 7 relief, it must meet that state’s means tests, or demonstrate it has an income that is not above the filing state’s median income, though if more than half of your debt are business expenses, you might not have to have to go through the means test. If for some reason you do not meet the requirements, there is always Chapter 13.
Seek advice from a bankruptcy attorney about your business’ financial health and if filing for bankruptcy protection under any of the above chapters is the right legal choice for you.