Get your questions answered from a Bankruptcy Attorney.
Nothing can be more frightening or intimidating than realizing bankruptcy might be a real necessity for your business. While the notion of bankruptcy may be that of financial failure, in many instances it can be a valuable tool to getting businesses back on track.
We asked Stephanie Schaeffer, Bankruptcy Attorney, to outline Bankruptcy 101 for our blog readers.
Chapter 7 business bankruptcy is designed for businesses that cannot repay their debts because they are no longer able to maintain operations and earn revenue. The company shuts down so the court-appointed Chapter 7 trustee can liquidate its assets and repay the creditors in an orderly fashion according to code priorities.
Chapter 11 business bankruptcy is designed for businesses that are struggling with debt but not to the point where they cannot maintain operations. The filing allows them to negotiate new arrangements with creditors that must be approved by the bankruptcy court. To file Chapter 11, your business must prove that it is currently generates consistent revenue. You must also submit a reorganization plan that outlines your strategy for repaying your debts and when you expect each debt to be paid off or a negotiated amount. The bankruptcy court must approve your reorganization plan along with your creditors.
Subchapter 5 of the Bankruptcy Code will provide for a slightly more compact and ideally, easier version of Chapter 11 Reorganizations for Small Business Corporate and Individual Debtors. The purpose of this new section of the Bankruptcy Code is to allow business debtors and certain individuals with debts below $ 2.75 Million to reorganize their obligations under Chapter 11 without the need for obtaining the consent of a class of “impaired” creditors as required under basic Chapter 11. There are other advantages for filing under Subchapter 5 that should be discussed further with counsel.
Chapter 13 is used for sole proprietors. There are debt limits for Chapter 13. Those debt limits change periodically based on factors like inflation and the average cost of living. If you file for Chapter 13 as a sole proprietor, you must file under your name, as opposed to the business’s name. Sole proprietorship lacks the legal protection of registered business entities. There is no legal difference between personal assets and business assets in a Chapter 13. The Chapter 13 trustee will therefore review your personal assets when evaluating your eligibility for Chapter 13 as well as your reorganization plan.
Law 4 Small Business knows that no two businesses are alike. So, any decision about bankruptcy needs to be entered into carefully. We offer attorney consultations for business owners that are trying to determine their next step. Your business may be down during COVID, but maybe not out.