A Small Business Owner’s Guide to Bankruptcy

If you are a small business owner and feel that your income is insufficient to deal with your debt, you are likely considering filing for bankruptcy protection and relief. But will bankruptcy help you achieve your goals for the business?  If so, which type would be best? This article sets forth the available options for you so when you meet with your bankruptcy attorney, you are prepared to discuss a course of action.

Three Questions You Must Answer when Considering Business Bankruptcy

First, What Are Your Goals for Your Business?

This comes down to one question:  Do you intend to close and liquidate the business, or do you intend to continue to operate your business? 

What you plan to do once your debt is discharged will help you decide whether bankruptcy is the best option and, if so, which type of bankruptcy you should file.

Second, Are You Personally Liable for any Business Debt?

If your small business is a sole proprietorship or general partnership, you are personally liable for your business debts. Also, if you personally guaranteed any business debt regardless of the type of business entity, you are personally liable for that debt.

Whether you are personally liable for business debt will factor into your decision on whether and what Chapter to file. Many small business owners find they must file two bankruptcies – one for their business, and one for themselves personally.

Third, How is Your Business Structured?

The way you organized your business dictates what bankruptcy options are available.

The Three Types of Business Bankruptcy

Chapter 11 Business Bankruptcy

Sole Proprietorship Chapter 11

Chapter 11 is available to both individual and business debtors. It is used by individual but rarely, because the requirements to file Chapter 13 are fewer and Chapter 13 is easier to navigate.

LLP, LLC, Corporation Chapter 11

Chapter 11 is the only type of bankruptcy available for businesses organized as anything other than a sole proprietorship, and that wish to continue operations rather than liquidate. 

Chapter 11 bankruptcy can be filed by both major corporations and small businesses. Although small businesses must follow most of the same rules and procedures as the large corporations, if the business owes less than $2.5 million dollars, the business can file as a “small business debtor” which streamlines the process somewhat. 

Even if your business qualifies as a “small business debtor,” filing and succeeding with a Chapter 11 bankruptcy proceeding is complicated. In order to file under Chapter 11 a business must be well-organized – you must produce the most recent balance sheet, statements of operations and cash flow, and federal tax return. With the help of your attorney, you must also develop a reorganization plan showing how your business will recover, make monthly payments to creditors, and endure strict oversight by the Chapter 11 Trustee for the duration of your plan.

Chapter 13 Business Bankruptcy

Chapter 13 business bankruptcy is not available, but because sole proprietors are considered the same entity as their business, a sole proprietor may file under Chapter 13 and use Chapter 13 bankruptcy protection to retain non-exempt assets, renegotiate secured debt, discharge both business and personal debts, and pay off past-due obligations such as sales tax over time. This will be done through the Chapter 13 plan over 3 to 5 years, depending upon the amount of debt owed and the amount of income the business has.

Sole proprietors can continue business operations after they complete their Chapter 13 plan and receive a discharge.

Chapter 7 Business Bankruptcy

Sole proprietors can file an individual Chapter 7 bankruptcy case and protect business assets using state or federal exemptions. 

Chapter 7 bankruptcy is also available to corporations, partnerships, and LLCs. These business entities can liquidate the company, but they do not qualify for exemptions (the laws that take property out of the bankruptcy state, making it unavailable to the Trustee or creditors). 

The most important thing to know about Chapter 7 is that a business filing under Chapter 7 cannot continue business operations. Chapter 7 bankruptcy discharges unsecured debts and empowers the Chapter 7 Trustee to liquidate business assets and repay the business’ creditors. Again, if you are personally liable for any business debt you as an individual are not protected by your business Chapter 7 filing. Creditors can still try to collect from you or sue you, and you will be liable for that business deb after your business receives a discharge. 

If you intend to continue business operations, you will not file bankruptcy under Chapter 7.

Consult With An Experienced Business Bankruptcy Attorney

If you are considering filing small business bankruptcy, know that evaluating the types of bankruptcy is complex.  An experienced business bankruptcy attorney can help you weigh your options, organize and file all needed documents, and make sure that neither you nor your business experiences any unintended consequences as a result of filing.

About the author:

David M. Offen, Esq.

Mr. Offen is a Philadelphia bankruptcy attorney who attended Temple University College and Law School. Mr. Offen is licensed to practice in the States of Pennsylvania and New Jersey. He is a member of the Eastern District of Pennsylvania Bankruptcy Conference and the National Association of Consumer Bankruptcy Attorneys and maintains an active blog on all aspects of bankruptcy filing and current events.