A struggling small business that files for bankruptcy may be able to thrive. Chapter 7, Chapter 13, or Chapter 11 bankruptcy may help you maintain your business depending on:
- what the business does
- the organization of the company
- assets of the business, and
- the amount of money that can be used to finance a repayment strategy.
Continue reading to discover more about the criteria used to assess the viability of a business bankruptcy. Additionally, a lot of business owners declare personal bankruptcy. Consider finding out how eliminating personal debt can assist you in maintaining your business.
Considerations for Continuing Your Business
Before continuing or ending your business, you should think about a number of factors. Here are a few important things to keep in mind.
Is the company profitable? You set out to run a successful business. If your company is consistently losing money, shutting down might be the best course of action. But let’s say you run a profitable business that is having trouble right now because of transient factors like the economy. It might make sense in that situation to continue operating despite the storm. Being realistic about preserving openness is crucial, though. Entrepreneurs frequently have an optimistic outlook and invest money in a project long after it’s time to give up.
Do the company’s assets outweigh its liabilities? It should go without saying that your company may be worth saving if its assets outweigh its liabilities and it is still profitable. It might be possible to keep the company afloat by reorganizing debt in bankruptcy (or eliminating it if you’re a sole proprietor). If bankruptcy is the only option, consider closing the company by selling the assets and settling the debt outside of bankruptcy (unless you want the Chapter 7 bankruptcy trustee to handle it for you in a transparent manner, in which case be sure to take into account the potential drawbacks discussed below). Most of the time, you’ll generate more money for your creditors while saving money. On the other hand, you probably already know that it might be time to cut your losses if the business is severely in the red.
Are business debts personally your responsibility? It might be more advantageous to keep your business operating while negotiating with creditors if you are personally responsible for its debts. This would prevent you from taking on additional debt. If the company is forced to close because there aren’t enough assets to cover liabilities, creditors may have no choice but to pursue your personal assets. Another typical strategy is for the business owner to declare bankruptcy under individual Chapter 7 in order to get rid of the personal guarantee.
Which Bankruptcy Type Should You File?
The structure of the business organization and the worth of the company’s assets will be the main determinants of the answer.
Why Businesses Don’t Bankruptcy Under Chapter 7 Often
Chapter 7 bankruptcy filings typically result in the closure of the company. Why? because a corporation or limited liability company, two examples of separate legal entities that own property, cannot be protected (LLC). The trustee merely liquidates the company’s assets, settles its debts, and closes the company.
Chapter 7 bankruptcy isn’t typically used to shut down businesses, though that’s not the only reason. Additional issues that might arise include the following:
The majority of business owners can wind down a company without assistance, saving themselves the extra expense of a bankruptcy attorney and filing fees.
Owners frequently have the ability to negotiate a better price for the assets than the bankruptcy trustee.
The partners’ individual assets are at risk when a partnership declares Chapter 7 bankruptcy.
Creditors have a quick forum to air grievances after filing for bankruptcy. In particular, the filing allows for litigation involving fraud, a partnership dispute, or an attempt to pierce the corporate veil (a lawsuit seeking to hold a shareholder personally responsible for the debts of the company).
Because of all of these factors—the main one being a transparent liquidation of the company’s assets—it is imperative to carefully weigh the risks and benefits of closing the business through bankruptcy.
Chapter 7 bankruptcy and the Sole Proprietor
A Chapter 7 bankruptcy may help you keep your business open if you’re a sole proprietor offering a particular service, despite the fact that it rarely benefits business owners. You might work as an accountant, a freelance writer, or a personal trainer, for example. Because the bankruptcy trustee cannot sell your ability to provide the service, this type of bankruptcy may be successful. This is how it goes.
Both personal and business debts fall under the purview of a sole proprietor. You will include all debt and discharge both types of qualifying debt when you file for Chapter 7 bankruptcy.
The relatively insignificant assets connected with a service-oriented business can also be safeguarded using bankruptcy exemptions. Exemptions, on the other hand, are rarely enough to cover sizable quantities of goods, machinery, or other commercial property. Sole proprietors with little to no business assets may find Chapter 7 to be a desirable option. It will eliminate the company’s debts and enable the owner to carry on with the service, keeping the business afloat.
Additionally, if your business debt exceeds your consumer debt, you can file for business bankruptcy and evade the means test. Therefore, it’s less likely that your new income will prevent you from being eligible for a Chapter 7 discharge if your business closes and you’re earning well working for someone else. However, it is possible, so consult a bankruptcy attorney before making any significant adjustments.
When You’re Compelled to File for Bankruptcy
Bankruptcy is typically a voluntary decision. However, it’s not always the case. In some cases, a debtor will be coerced into declaring bankruptcy by creditors.
Involuntary cases are extremely rare. The process is primarily used by creditors to compel an organization into bankruptcy. Because it’s difficult to meet the requirements to file an involuntary bankruptcy, it’s rarely used as evidence against an individual in consumer bankruptcy. In the majority of cases, several creditors must band together and decide to file a lawsuit against a debtor. If successful, the court names a bankruptcy trustee who will take control of every aspect of the company, sell its assets, and then divide the proceeds among the creditors.
Although it might be beneficial, many creditors would rather start their own collection processes. They maintain their capacity to take a bigger chunk of the company’s assets by doing this. A creditor who files for bankruptcy is more likely to have to split the proceeds with other creditors and receive a smaller payout or, in some cases, nothing at all.
It’s crucial to realize that a creditor might not be able to retain money received just before bankruptcy, particularly if it’s viewed as a preference claim that gives one bankruptcy creditor preference over another. However, a lot of creditors are prepared to assume the risk and, if necessary, return the money.
Similar to a voluntary action, the involuntary process starts with the filing of official bankruptcy forms with the court. Read Involuntary Bankruptcy if you want to learn more.
Chapter 13 Bankruptcy and the Sole Proprietor
A Chapter 13 bankruptcy case can only be filed by an individual. So you cannot file Chapter 13 on behalf of your company if it is a partnership, corporation, or limited liability company.
If you are a sole proprietor, just like with a Chapter 7 bankruptcy, you can include both personal and business debts in your Chapter 13 bankruptcy. If the sole proprietorship generates revenue, a Chapter 13 bankruptcy may be your best option. By making lower payments on nonpriority unsecured personal and business debts like credit card bills, utility bills, and personal loans, you might be able to keep the business operating.
However, if your sole proprietorship requires you to keep a lot of supplies, items, or pricey equipment on hand, you might run into a problem. Even though Chapter 13 bankruptcy permits you to keep your possessions, you must still be able to protect them with a bankruptcy exemption (and the majority of exemptions won’t cover important business assets). If not, you must pay the three- to five-year repayment plan’s value for the nonexempt assets. For instance, you would have to pay your creditors $2,500 per month for five years along with any other necessary sums if you owned $150,000 in nonexempt construction equipment.
Keeping all the property you require may not be possible if you don’t have enough income to cover a sizeable monthly plan payment because many business owners are strapped for cash.
Every Company in Chapter 11 Bankruptcy
In order to reorganize debts and continue operating, partnerships, corporations, and LLCs must file a Chapter 11 bankruptcy as opposed to a Chapter 13 bankruptcy. A Chapter 11 bankruptcy can also be filed by a sole proprietor. A repayment plan is used to pay creditors in Chapter 11 bankruptcy, which is similar to Chapter 13 bankruptcy in that the business keeps its assets. In contrast to a Chapter 13 bankruptcy, a straight Chapter 11 is typically much more difficult because the company must submit ongoing operating reports and the plan must be approved by the creditors. For the majority of small businesses, it is also prohibitively expensive.
Bankruptcy is a dreaded word by not just business owners, but families as well. It is not something that people want to go through, but it is the reality for many. With a business, sometimes you can put in all the hard work in the world but still end up filing for bankruptcy.
When starting a business, 30% will fail during the first two years. That number increases to 50% in the first five years, and 66% in the first 10 years. Only 25% will actually make it to at least 15 years.
With these stark statistics, there’s a likely chance that a new business may end up filing for bankruptcy. If that is the case, can your business survive, and if it does, can you get it back on track?
Getting the top bankruptcy attorneys in Scottsdale is one step to take. After that, consider some of the following points to help you get your business back on track.
Determine Which Type of Bankruptcy You’re Filing For
Depending on which bankruptcy you end up choosing to file, whether it be Chapter 7, Chapter 13, or Chapter 11, the case will significantly impact the outcome for your business.
For Chapter 7, your entire business is liquidated and sold off. You would then have to start over from scratch. In contrast, Chapter 13 bankruptcy will affect your company, but you will still have the debt to deal with. With Chapter 11 though, your business will continue to operate daily as your case pushes through the bankruptcy process and a reorganization plan is approved.
Understand What Went Wrong
One of the most important things to focus on after going through the bankruptcy process is to determine what went wrong. One of failure’s benefits is that it’s an opportunity to learn and grow. Take a look at your prior business plan and make essential notes of which parts went wrong that caused you to go into bankruptcy.
Build Your Credit Back Up
One of the hardest things about bankruptcy is that your credit score takes a significant hit. That number is essential if you need to file for a loan to start your business back up again.
Work towards building your credit back up. Start by paying all of your bills and credit cards on time. The more diligent you are about any remaining debt and paying it off, the more favorable outcome it will have on your credit score.
Find Another Source of Revenue
If your business can continue while you are going through bankruptcy, find additional ways to bring in more money. The reason you went into bankruptcy is that you lacked money. So, if you can find other ways to increase your monthly revenue, you’ll have more money to put towards your debt and to keep your business running.
Don’t look at bankruptcy as the end of an era. Instead, consider it as a second act— the new chance to get your company back up and running smoothly once more. It will take a lot of hard work and dedication, but a business can survive and thrive after filing for bankruptcy.