Author Archives: Canterbury Law Group

Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code in 2019 to make reorganization bankruptcies more accessible to small businesses. It gives small businesses that are earning a profit, but having trouble paying their obligations, a simplified process for paying down their debt. Businesses that file under Subchapter 5 can force creditors to accept court-approved repayment plans of three to five years. They can also use the plan to shed some of their unsecured debt. Read on to learn more.

Business Bankruptcy Types

• Chapter 7: This is a “liquidation” bankruptcy for businesses that are no longer viable. You will be required to sell all of your business assets to pay creditors and close the business. In return, you will be debt free.
• Chapter 11: This is a “reorganization” bankruptcy where you can force creditors to negotiate payment plans while the business stays open. This lets you repay most of your secured debts while continuing to run the business. Some of your unsecured debt may be discharged.

Both types of bankruptcy offer an automatic stay to protect you from creditors. This is often the biggest benefit of filing for bankruptcy. The automatic stay keeps creditors from collecting and will stop most court actions against you.

Benefits of Subchapter 5 Bankruptcy

Filing a small business bankruptcy under Subchapter 5 offers you the following benefits:

• Continued business operations: You will continue to own and run your business so long as you stick to the payment plan. You will also need to pay your unsecured creditors all of your disposable income while the plan is in place.
• No creditor approval: The bankruptcy court can confirm your reorganization plan without the approval of your creditors if it finds it to be fair. A traditional Chapter 11 plan must be approved by creditors.
• Only your business can file a plan: In other Chapter 11 cases, your creditors can submit a plan on your behalf. But in Subchapter 5 only your business can submit one.
• No disclosure needed: In Chapter 11 cases, you must normally file a detailed disclosure statement with the court. The statement provides a breakdown of your business and if you can repay your creditors. In a Subchapter 5 case, no statement needs to be filed.
• Special trustee: You will continue operating your business in bankruptcy, but a trustee will be named to monitor its operations. The trustee will also make recommendations to the court regarding confirmation of the reorganization plan.
• Expenses paid in installments: In a traditional Chapter 11 case, you must pay all of the administrative expenses on the day the plan becomes effective. Subchapter 5 allows you to pay the expenses over the length of the plan.

Who Can Claim Subchapter 5 Bankruptcy?

Businesses that qualify for Subchapter 5 bankruptcy must be pursuing business activities and have debt that does not exceed $2.75 million. The debt cannot include those owed to company insiders. Also, at least 50% of the business debt must come from business activities. 

COVID-19 Bill Temporarily Expanded Eligibility

The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March 2020 expanded Subchapter 5 eligibility to businesses with debts of up to $7.5 million for one year. The change was made to help with the expected increase in business bankruptcies as a result of the pandemic.

Creditors Still Enjoy Some Protections

Subchapter 5 made it easier for small businesses to file for a reorganization bankruptcy, but creditors still have the following Chapter 11 benefits:

• The reorganization must offer creditors at least what they would have received had you filed under Chapter 7.
• Secured creditors may still retain their rights to the property you put up as collateral.
• Secured creditors can protect their collateral and seek relief from the automatic stay.

A Bankruptcy Attorney Can Help

Subchapter 5 simplified Chapter 11 filing for small businesses, but it is still a complex process. A skilled attorney can walk you through each step in filing for bankruptcy to ensure the best possible result. Working with an experienced bankruptcy attorney near you can offer you guidance and work to protect your assets.

When you guarantee a loan for your business, friend, or family member, you make yourself liable for it. Read on to learn more.

What Is a Personal Guarantee?

A personal guarantee is an agreement that allows a lender to go after your personal assets if your company, relative, or friend defaults on a loan. 

Why You Might Sign a Personal Guarantee

Most new companies don’t have much in the way of assets. To increase the odds of getting paid, a lender will require a personal guarantee before extending a property loan or another obligation.

How to Eliminate a Personal Guarantee With Bankruptcy

It’s relatively common for a business owner to file individual bankruptcy to get rid of a personal guarantee—and most personal guarantees will qualify for discharge. Also, keep in mind that filing on behalf of the business won’t get rid of your personal obligation to pay back the guaranteed loan

Liens Remain in Bankruptcy—Usually

Some personal guarantees include a security interest in your personal assets. In that case, the lender will typically have a lien on your property. 

Personal Guarantees in Bankruptcy Chapters 7 and 13

Each bankruptcy case is different. It’s common to have a lot of moving parts and considerations, so it’s best to meet with a bankruptcy attorney. 

Chapter 7 Bankruptcy

If you don’t have much in the way of income or property—primarily debt—Chapter 7 will likely be your best option. You can wipe out (discharge) qualifying debt, such as credit card debt and personal guarantees, in approximately four months. Chapter 7 also works well if you have a substantial income, and the majority of your debt is business debt. 

Chapter 13 Bankruptcy

Many business people find this chapter helpful in several situations. You, as an individual, not the business, would be filing Chapter 13—companies can’t file. Unlike Chapter 7, you can keep all of your property, and in most cases, you’ll pay a smaller portion of your personal debt over time. Chapter 13 has a few other benefits that aren’t available in Chapter 7. If you’re like many business people, you might have fallen behind on a house or car payment while trying to keep the company afloat. You can catch up on these payments through the Chapter 13 repayment plan and keep the home, car, or other secured property. Also, you might be able to reduce the amount you’d have to pay on some collateral through a cramdown in Chapter 13 bankruptcy. 

Source: https://www.alllaw.com/articles/nolo/bankruptcy/personal-guarantee-bankruptcy.html

There are in excess of 50,000 bankruptcies by companies per year in the US. Generally, employees are well treated receive as creditors in bankruptcy courts, payment for wages owed is not  guaranteed once employers file for bankruptcy. Therefore, employees should know how to operate in a judicious manner. Read on to learn more.

Types of Bankruptcy

The two kinds of bankruptcy employers can file are: Chapter 7, where the company is liquidated by selling off the assets of the company and the proceeds are divided among all of the creditors in order of their priority, which is established by bankruptcy law. The second option is Chapter 11 allows a company to reorganize and restructure its debt contracts. 

Payroll

Payroll obligations can be impacted by bankruptcy. If an employer falls behind in making payroll, then files bankruptcy, employees become creditors and take priority in receiving remuneration. 

Rights as a Creditor

Employees can file a proof of claim and are entitled to a portion of any proceeds as a result of the bankruptcy. This provision in the tax law allows employees to potentially collect money from other creditors who hold a lower priority in the bankruptcy.

Payroll Taxes

By law, the employee and employer split the cost of payroll taxes. In bankruptcy, the portion of payroll taxes collected from employees cannot be discharged, but the half owed by the employer can be discharged.

Don’t Pay Yourself a Bonus or Back Pay

The bankruptcy system treats you in a similar way to an insider creditor. So if you pay yourself a bonus, repay a loan you made to the business, or otherwise take money out of the company during the 12 months prior to filing for bankruptcy, might be considered bankruptcy fraud the results of which may land you in jail or mean your bankruptcy claim is dismissed by the courts.

Source: https://smallbusiness.chron.com/can-employer-file-bankruptcy-out-payroll-10027.html