Business Bankruptcy
Business Planning

Can Bankruptcy Save Your Business

If you’re struggling with debt, but don’t want to shut down your business, bankruptcy might be one way to save your company. While this may sound paradoxical, many big corporations – American Airlines, General Motors, and Kodak – have successfully used bankruptcy to restructure debt and get a fresh start.

The main difference between you and a big corporation filing bankruptcy is that if you use personal bankruptcy (either Chapter 7 or Chapter 13) to discharge or restructure your debt, it will impact your personal credit. In contrast, a Chapter 11 bankruptcy used by big corporations doesn’t hurt the credit of corporate officers or shareholders.

However, a few years of negative credit may be a valid option to give you another chance to rebuild your business. But deciding between Chapter 7 and Chapter 13, or whether to use bankruptcy at all (as opposed to negotiating directly with creditors), are big decisions—but ones we can help you evaluate.

How does Chapter 7 work?

Chapter 7 is a liquidation bankruptcy, which means all of your non-exempt assets (including your business assets) will be sold off by a court-appointed trustee to repay your creditors. This can let you wipe your personal debts clean and start over, albeit without credit available to you for some time.

And though your personal assets will be included in the bankruptcy estate, you can use exemptions to protect this property. In fact, if you don’t have a high income or significant assets, you might be able to use exemptions to protect all of what you do have using what’s known as a “no-assets case.” This is designed to ensure business owners have enough assets to sustain themselves while they get back on their feet.

How does Chapter 13 work?

Chapter 13 lets you keep your assets and repay some or all of your debts through a court-approved payment plan lasting three or five years. By filing Chapter 13, the court grants an “automatic stay” stopping ALL creditors from pursuing you. This temporarily halts repossession of your business and personal property, allowing you to potentially lower your payments—or at least give you time to catch up on those you’re behind on. 

When it comes to secured debts, you can give up the collateral and convert the debt to an unsecured claim, or keep the property and continue to make payments through your repayment plan. What’s more, you typically pay only a portion of your unsecured debts, and the remainder is discharged (forgiven) at the end of the bankruptcy, provided you kept up with payments.

However, Chapter 13 requires that you pay off certain “priority” debts—back taxes, child support, and alimony—in full, regardless of your income. 

Start with a clean slate

Both types of bankruptcy can improve your financial situation and let you re-focus on your business, without closing your doors. However, bankruptcy is not a panacea, and if you fail to meet your court-ordered obligations, you can face serious consequences. Given this, consult with us as your Family Business Lawyer® to see if either of these bankruptcy options (or negotiating directly with creditors) are right for you.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.

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money
Business Planning

The Ins and Outs of Chapter 7 Bankruptcy for Small Business Owners

It’s a simple fact of entrepreneurship: Small businesses fail all the time and for many different reasons, some of which are outside of the owner’s control. If you’re falling deeper and deeper into debt by keeping your company open, sometimes the best business decision you can make is to shut down the business and cut your losses. Let's uncover why Chapter 7 bankruptcy might be good for your business.

When it comes to closing a debt-laden business, bankruptcy is one option that can allow you to stop bleeding money and get a fresh start. However, filing for certain types of bankruptcy may not be available for your business entity or the best way to go for your personal situation.

There are multiple types of bankruptcy filings, each with their own benefits and drawbacks. Here we’ll look at what’s involved in a Chapter 7 bankruptcy, discuss its pros and cons, and find out how it affects different types of business entities.

Who can file Chapter 7 bankruptcy?

Both individuals and protected business entities—partnerships, limited liability companies (LLCs), and corporations—can file for Chapter 7 bankruptcy. Business owners can file Chapter 7 for themselves or their business, but since a sole proprietor is personally liable for business debts, the entire financial situation of both will be included when they file for a personal Chapter 7.

Chapter 7 is a liquidation bankruptcy, which means all of your non-exempt assets will be sold off by a court-appointed trustee to repay your creditors.

Advantages of Chapter 7 bankruptcy

As a sole proprietor, Chapter 7 lets you wipe out both personal and business debt in a single filing. And even though your personal assets will be included in the bankruptcy estate, you can use exemptions to protect some—and maybe even all—of your property.

Indeed, if you don’t have a high income or significant assets, you might be able to use exemptions to protect all of your money and property through what’s known as a “no-assets case.” This is designed to ensure that small business owners have enough assets to sustain themselves while they start over again.

That said, the amount of property you can protect in Chapter 7 bankruptcy varies greatly from state to state and also depends on the value of your assets. Given this, you should consult with us as your Creative Business Lawyer to review your state’s exemptions laws.

If your business is a partnership, corporation, or LLC, Chapter 7 is an easy and transparent way to close your business and liquidate its assets, as the trustee becomes responsible for selling off assets and paying your creditors. This provides you with a convenient way to wash your hands of the failing business and start with a clean slate.

Disadvantages of Chapter 7 bankruptcy

Only sole proprietors receive a discharge of business debts by filing Chapter 7. Also, business entities are unable to use exemptions to protect assets in Chapter 7, which means the trustee will sell off all of your business assets to pay creditors, and your business will be closed for good.

What’s more, even if you own a protected business entity, if you’re personally liable for any of your business obligations (i.e. you personally guaranteed a business loan), you’re still on the hook for that debt unless you file for personal Chapter 7 bankruptcy. This is why many business owners file for Chapter 7 on behalf of both their business and personal liabilities.

The Bottom Line

Due to the final nature of Chapter 7, it’s not for everyone. It’s best to file a Chapter 7 if you’re looking to shut down your business for good, the business doesn’t have significant assets, and you’re not personally liable for business debt.

It’s not a good option for high income filers or those with lots of property, as depending on your income level, you may not even qualify for Chapter 7. Moreover, some debts are not dischargeable, including student loans, child support and alimony, along with certain income taxes, so in these cases, Chapter 7 would do no good.

Navigating the bankruptcy process is a complicated undertaking and should only be done with the trusted advice of legal counsel. We can guide you through the process, explaining all of your options, so you make the choice that’s best for you and your business. Contact us today to learn more.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.

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