If you’re a small business owner struggling financially under increasing debts, you should be aware of all of your financial options. Some business owners might see bankruptcy as a final option that will ultimately result in the death of their business; however, this is an unfortunate misconception. There are ways to file for small business bankruptcy and preserve your business throughout the bankruptcy process.
That is what we will talk about today – how bankruptcy can potentially allow you to restructure debts and keep your business running profitably.
Small Business Bankruptcy Options
You should try to file under chapter 11 bankruptcy because this chapter has a subchapter built-in for small businesses. We will discuss chapter 11, subchapter V as well as some other ways you can potentially file and keep your business.
Depending on your income stream and the amount of debts you owe, you may be able to restructure your debts under chapter 11. Under chapter 11, the bankruptcy court approves a reorganization plan that will allow you to pay off your debts over a predetermined period of time.
You can keep most of your assets, and your business remains operational.
If the amount of debt you owe is under 7.5 million dollars (recently raised from 2.7 million due to the COVID-19 pandemic), then you can file under subchapter 5. This subchapter is designed to make the process more affordable for smaller businesses. There are protections in subchapter 5 that limit the power of creditors in a few key ways:
- No creditor committee, which is normally retained at the expense of the debtor and is present to guard the interest of creditors.
- No creditor consensus, which means a court can approve a repayment plan and discharge debts despite the objections of creditors.
Due to these leniencies, however, a small business debtor is under greater scrutiny and must file earnings and other data with the courts more regularly.
What if you are ineligible for chapter 11 due to the amount you owe? You may still have bankruptcy options that allow you to keep your business in operation.
Chapter 7 and Chapter 13
Chapter 7 can be filed by individuals or business entities. However, for businesses, the end result is the total liquidation of assets. Filing as a business under chapter 7 should only be pursued by business owners who wish to cease the operation of their business.
However, sole proprietors who run businesses out of their homes and whose tools of the trade can be exempt from seizure by the trustee can continue to operate through bankruptcy. This is possible through various exemptions available to debtors who file for bankruptcy under chapter 7.
The bankruptcy court will allow a certain number of exemptions, and often these include residential property or other assets. Different states have different types of exemptions that you may or may not be eligible for. As mentioned above, debtors can protect tools of the trade up to a certain dollar amount through what are known as “tools of the trade” exemptions. Additionally, some states offer “wildcard” exemptions that allow debtors to choose an asset that is immune from seizure.
If your business is small enough and structured as a sole proprietorship, it may be possible to your business while filing for chapter 7.
Chapter 13 bankruptcy is specifically designed for individuals. However, depending on how your business is structured, you may be able to file under chapter 13 and keep your business assets while restructuring your debts.
So, how is this possible?
LLCs or corporations cannot file for chapter 13 bankruptcy. However, business owners who operate sole proprietorships can file as an individual under chapter 7 and chapter 13.
Sole proprietors can pay off their debts while keeping their business running. These repayment plans, approved by the bankruptcy court, usually last between 3 and five years.
What is the Best Bankruptcy Option For Your Small Business?
As you can see, the bankruptcy code is much more nuanced than the average person might have imagined. Suppose you are seriously contemplating bankruptcy as a way to discharge or restructure your debts. In that case, it is crucial to have a decent understanding of the many ways you may be able to save your business while also successfully filing for bankruptcy.
For LLCs and corporations, chapter 11 is the best way to restructure debts and continue operating your business. Depending upon how much you owe, you may even be able to file under chapter 11 subchapter 5 as a small business debtor. This process, though more involved, affords you greater leniency in the repayment of debts and the structuring of your repayment plan.
If you’re a sole proprietor, then there are ways to file as an individual and keep your business assets exempt from seizure. We highly recommend discussing your options with a financial advisor and a bankruptcy lawyer before making any final decisions.