Small businesses, whether they are sole proprietorships, general partnerships, corporations, or limited liability companies, are notoriously difficult to make successful. Many of them struggle with debt. Sole proprietors and general partners are personally liable for the company’s debts, which means that creditors can pursue their personal assets to satisfy the business debts. A limited partner or owner of a corporation or limited liability company usually is not held personally liable for business debts, but may nonetheless be struggling to repay them.
If your small business is struggling with certain types of debts, bankruptcy under Chapter 7, 11, or 13 may provide a feasible solution. Each has different advantages and drawbacks. Choosing the correct option can affect your ability to keep your assets and avoid expensive litigation, and it may also affect your ability to rebuild the business in the future. There may, however, be non-bankruptcy alternatives that are better options altogether, depending on your situation. For most businesses, it is prudent to consult an experienced bankruptcy attorney to go over the consequences of filing for bankruptcy.
Effects of Chapter 7 Bankruptcy on a Business
Filing a Chapter 7 business bankruptcy does not eliminate personal obligations on business debts for partnerships, corporations, and limited liability companies. Partners or owners can file a separate personal Chapter 7 bankruptcy. However, a sole proprietorship is not a separate legal entity, and if you file a personal Chapter 7 bankruptcy, you can wipe out both business and personal debts this way.
Chapter 7 is most appropriate for a business that does not have a future and also does not have significant assets. You can file Chapter 7 in order to shut down and liquidate a business, but you will not receive a discharge or be able to use exemptions to protect your assets. However, the bankruptcy trustee can use your assets to pay creditors to the extent possible.
Chapter 7 vs. Chapter 11
Chapter 7 bankruptcy entails liquidating business assets to pay off debts, while Chapter 11 entails continuing business operations while paying off debts under a repayment plan.
Effects of Chapter 11 Bankruptcy on a Business
Chapter 11 is a business reorganization bankruptcy that permits businesses to continue operations while also reorganizing debts through a debt repayment plan. In most cases, it is not wise to file under Chapter 11 as an individual, since Chapter 13 is less expensive and easier. Certain individuals, however, are not eligible for Chapter 13 because they have over $1,081,400 of secured debt or over $360,475 of unsecured debt. In those cases, an individual may have to file for Chapter 11.
Chapter 11 is more complicated and expensive than either of the other two chapters, but both individuals and business may file under this chapter. Chapter 11 is most appropriate for a larger-scale business whose owners want to rebuild and have a plan for the future.
There are requirements for Chapter 11 that are not applicable to Chapter 7 or 13. For example, as a business owner you will need to file operating reports, and a creditors’ committee will need to be appointed. The creditors will vote on your debt reorganization plan and must approve it before it is confirmed by the court.
If you have a business with less than $2,343,300 worth of debt, however, you are considered a “small business debtor.” The proceedings for a small business debtor under Chapter 11 are usually quicker, and no creditors’ committee is required. The court can waive the usual disclosure statement requirement. However, you only have 300 days to propose your restructuring plan. Additionally, you may have oversight by the United States Trustee’s Office in some states.
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Effects of Chapter 13 Bankruptcy on a Business
Only individuals can file Chapter 13 bankruptcy. This means that if you are a sole proprietor, you can file Chapter 13 to reorganize personal and business debts, but if you are a partner, or you own a corporation or limited liability company, you cannot file Chapter 13 on behalf of the business. If Chapter 13 bankruptcy is available to you, it can be a more efficient and less expensive process.