Just like individuals, small businesses can run into financial difficulties and fall behind on their debts and other bills. That’s why bankruptcy is an option for a small business. Deciding whether to pursue bankruptcy and how to do so, is no simple task. You need experienced legal counsel to review your small business situation and guide you as to the best option.
Toronjo & Prosser Law is ready to assist. We advise small businesses as to how bankruptcy can help, then get started with the necessary paperwork and court proceedings. If your small business is falling behind and you’re not sure what to do next, reach out to us today.
Overview Of Small Business Bankruptcy
Companies that find it difficult or impossible to pay their debts can quickly see their finances spiral out of control. Significant debt will lead to creditor threats and lawsuits. Meanwhile, these small businesses may also struggle to pay other monthly expenses like vendor invoices or payroll. Decreased cash flow, economic downturns, and other conditions – many of which are not in the business’s control – could account for these challenges.
Bankruptcy may be an option, and which chapter you file under will depend partly on what your goals are. For some small businesses, reorganization under Chapter 13 may be an option that will allow their business to return to profitability. But for many, Chapter 7 and the eventual closure of the business is the only realistic option due to overwhelming debt. We will review both here, starting with Chapter 7.
Chapter 7 Bankruptcy For Small Businesses
A business that is faced with insurmountable debt should consider a Chapter 7 bankruptcy. Known as a liquidation bankruptcy, a trustee appointed by the court will liquidate all available assets and pay off as many creditors as possible. Meanwhile, the small business will stop operating and ultimately close. The small business won’t be able to keep any property at the end of the process; even after liquidation is complete, the business won’t receive a discharge.
Chapter 7 is available to a wide variety of different business organizations. One question that business debtors often have is whether the owner will be personally liable for the business debt. These are some of the most common business structures and how personal liability is addressed:
Sole proprietorship. There is no legal distinction between the owner and the business, so the owner is therefore liable for business debt. However, with Chapter 7, both the owner’s personal and business debts can be handled by one filing.
Partnership. In a general partnership, the partners (all of whom are known as general partners) are personally liable. In a limited partnership, the general partner is liable but the limited one is not. Personal assets may therefore be at risk to pay off creditors.
Corporation. Shareholders generally do not have personal liability for business debts, including in bankruptcy. However, there are cases in which business formalities are disregarded, which allows creditors to pierce the corporate veil and pursue the shareholders’ personal assets.
Although a Chapter 7 bankruptcy will mean the end of the business, it can be accomplished relatively quickly and efficiently in most cases. The automatic stay that goes into effect at the time the bankruptcy is filed will cease all creditor collection actions such as foreclosures, garnishments, and lawsuits.
Chapter 11 Bankruptcy For Small Businesses
The major advantage to a Chapter 13 bankruptcy is that the business can potentially reorganize its debts and continue to operate. It is only available to sole proprietors, meaning that an owner cannot file a Chapter 13 for an entity like a corporation. However, sole proprietors can include business debts for which they are personally liable. As with Chapter 7, a Chapter 13 bankruptcy filing will trigger an automatic stay that prevents further creditor actions to collect on business debts.
Whereas Chapter 7 is a liquidation bankruptcy, the advantage of Chapter 13 is that the business debtor can retain its assets and potentially cure delinquencies. The business can stay in operation during this time as well and possibly become profitable again. However, there are more requirements for a Chapter 13 bankruptcy versus a Chapter 7, including providing detailed information related to the debtor’s income, property, and monthly expenses. Many Chapter 13 bankruptcies are also not successful due to insurmountable business debt.
Which Option Is Right For You And Your Small Business? Talk To Us Today
Small businesses facing financial crises have a number of different options available to them, depending on their legal structure, the nature of their debt, and their ultimate goals. A Chapter 7 or Chapter 13 bankruptcy may be the best option for your situation. There are also alternatives to bankruptcy, such as negotiating with your creditors
The most important thing you can do is not delay taking action. Let Toronjo & Prosser Law help. We can file all of the necessary paperwork and handle the court proceedings and other issues that accompany the bankruptcy process. Call today to schedule your confidential consultation.