Running a business can be a risky venture. Virtually any business needs to take on at least some debt in order to get established and grow, but when debts get out of hand, they can get in the way of your goals.
As bankruptcy lawyers, our goal is to help small business owners explore their bankruptcy options. Whether you want to keep your business or give it up, we will provide the guidance needed to help you navigate through this difficult situation.
If you choose to file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, we’ll carefully guide you through the process.
A business can operate as a sole proprietorship, partnership, corporation (S Corporation, C Corporation, LLC, PC, etc.) When a business gets into financial trouble, the first thing that a bankruptcy lawyer will want to know is what type of business entity is being operated. The legal advice given can be very different depending on the type of legal entity that exists.
Our firm focuses on the actual owner(s) of the business and how to protect them individually. Sometimes, both the business itself and the owner(s) of the business need to file bankruptcy. It is important to always keep in mind that, except for a sole proprietorship, the owner of the business and the business itself are two separate legal persons or entities. Therefore, protecting just the corporation, for example, does not protect the individual owner. Similarly, protecting the individual owner does not protect the business entity. A big-picture analysis and strategy must be conducted for each situation. There are no one-size-fits-all solutions. Each case is unique and requires the consideration of multiple factors.
Bankruptcy Options for Small Business Owners
|Chapter 7||Chapter 11 (Subchapter V)||Chapter 13|
|Bankruptcy Type||Liquidation (by Trustee)||Reorganization or Controlled Liquidation Over Time||Reorganization|
|Time for Filing to Discharge||4-6 Months (typical)||3-7 Years (typical but varies)||3-5 Years|
|Type of Business Entity||All types||All types.||Only individual people (no business entities except for sole proprietors)|
|Other Qualifications, Restrictions, and Features||Any individual or entity. |
No big benefit to corporate entities due to the lack of discharge and liquidation process.
Normally used by individuals.
|The debtor must show that at least 50% of debts were from “business” activities.|
Must be engaged in a business activity but can discontinue after filing.
Commonly useful when Chapter 13 is not available.
|Most flexible bankruptcy with many options to reorganize. |
Can keep or retain assets in most cases if a monthly payment is practical.
|Eligibility of Debt||Only individual people can get a discharge. Corporations, etc. do NOT receive discharges in Chp. 7||Unsecured and Secured debts must total less than $2,725,625 (combined)||Unsecured Debts < $419,275|
Secured Debts < $1,257,850
|Revenue Requirement||No||No, Not Necessarily||Yes|
|Listed on Credit Report||10 Years||Varies||7 years|
Chapter 7 Bankruptcy
The Chapter 7 bankruptcy process is what many people think of as traditional bankruptcy. It allows you to permanently eliminate certain types of debt, in exchange the Trustee may (or may not) liquidate certain assets. Then, in certain Chapter 7 cases, you may be able to negotiate with the Trustee or creditors to retain certain non-exempt assets for a very reasonable price. In Chapter 7 business cases, it is not unusual for your lawyer to communicate with the Trustee in order to come to a fair deal to keep some or all of your assets. Any agreements reached with the Trustee must be ultimately be approved the Bankruptcy Court.
Chapter 7 is available for businesses (individuals/sole proprietors only) who wish to continue operation while correcting a poor financial situation. If you do not wish to continue running your business, Chapter 7 can also help you wind down a failed business and remove the debt so you can move on. Note: A corporate entity, like an LLC or S-Corp, may also file Chapter 7, but the entity will NOT receive a discharge. Sometimes, in limited circumstances, a Chapter 7 corporate bankruptcy will allow the Trustee to liquidate assets in an organized fashion.
Many small business owners mistakenly believe that if they file Chapter 7 bankruptcy, their business assets will be automatically seized and sold off. In fact, if it is possible to run your business profitably after the bankruptcy, it may be possible to negotiate with the bankruptcy Trustee to purchase back the equity or otherwise keep the business going under your control. On the contrary, corporate entities that file Chapter 7 bankruptcy would not want to continue operations, but it may be possible for a new entity to purchase the assets of old company and the buyer (new entity) could essentially be a new business doing the same type of work. So long as everything is fully disclosed, the old owner(s) of the business may indeed be the owner(s) of a new business doing the same thing.
This is a very tricky area to navigate, and an inexperienced or careless or unaware bankruptcy lawyer can do a lot of damage. We have a strong background of helping small businesses come through the Chapter 7 bankruptcy process.
Chapter 11 Bankruptcy (Subchapter V)
Larger businesses that wish to reorganize under bankruptcy protection generally file for Chapter 11 bankruptcies. These are the major corporate bankruptcies that we hear about on the news. In February of 2020, Chapter 11 has also become an option for small businesses and it is commonly referred to as a Subchapter V Chapter 11 bankruptcy. The new Subchapter V Chapter 11 bankruptcy has dramatically increased the ability of a business to reorganize. Many of the superior aspects of the individual Chapter 13 bankruptcy laws were brought over to the Chapter 11 world (via Subpart V).
Chapter 11 bankruptcy is a reorganization of debt that is primarily used by businesses that need to restructure their finances. This form of bankruptcy provides a viable option for keeping a business open, while the company works to get itself back on track.
When filing for bankruptcy, the business must present a plan for debt repayment. This repayment plan may be accompanied by a business restructuring plan that is needed to support the debt repayment. This plan must be approved by the courts. Chapter 11 bankruptcies are very flexible and not two bankruptcies look alike. Each one is very customized to every debtor.
Chapter 13 Bankruptcy
Another option for small business bankruptcy is Chapter 13 (for people that operate as a sole proprietorship). Chapter 13 reorganization provides a more straightforward bankruptcy process which is generally more appealing to business owners than Chapter 11. Important: Sometimes the owner of a corporate entity may find it very helpful to file a personal Chapter 13 or Chapter 7 bankruptcy while the business itself files a Chapter 11.
Under the Chapter 13 bankruptcy reorganization process, you can modify your existing debt payments by reorganizing eligible debt into a new three to five-year repayment plan. This process gives you time to pay off business (and other) debts while you continue to operate your business and bring in revenue.
We Can Help You Decide Which Option is Best
Whether you want to continue your business operations or wind things down, don’t hesitate to contact us to discuss the impact of bankruptcy on your small business.
Our experienced attorneys serve small businesses throughout Nebraska and Iowa. Contact us to speak to one of our experienced bankruptcy lawyers or to arrange a free initial consultation. If you cannot come to our Omaha offices, we can consult with you by telephone.
Small Business bankruptcy FAQs
A properly filed bankruptcy is able to dramatically improve many businesses. Many failing businesses simply have too much debt even though it is a well-run operation that has matured over time. Too much debt will destroy any business, even good ones. The idea is for a bankruptcy to assist in getting rid of the excess debt while still maintaining the profitable parts of the business. There are many options to consider from spreading the debt over a longer period of time to negotiating more reasonable and tolerable terms with the power of the bankruptcy laws.
While there is no requirement that both a business and personal bankruptcy be filed, in many instances, it is desirable to do so. Much of the decision is determined by whether business debts have been individually guaranteed, thus spreading the business debts over to the individual. This is a very common situation with small businesses. On the contrary, sometimes it makes more sense to just file a personal bankruptcy and then stop operating the business under the corporate entity. Many people start a new business after they file personal bankruptcy and essentially do the same type of work. This can be a very effective way to get a fresh start.
It depends on what type of business entity that you are operating. Sole proprietors generally continue to operate the business without any stoppage. Clear communications must be had with the bankruptcy trustee; however, the normal situation is that the business continues. If a personal bankruptcy is filed and the business is a corporation, then the corporation can normally continue to operate per usual. If the business entity itself files bankruptcy, then permission must be obtained from the Trustee and Court to continue operations. Most of these issues are planned out in advance of filing bankruptcy so that there are no surprises.
It depends on whether the business debt is also a personal liability. Many business owners are required to personally guarantee the business debts with banks and vendors. Those debts essentially transfer over to the individual when the business fails to make payments. On the other hand, if the debts are strictly those of the business corporate entity, then it may be possible to completely avoid filing a personal bankruptcy.
There is no minimum debt need to file for a small business bankruptcy. Rather, practical and legal considerations should be closely analyzed. Obviously, a bankruptcy would not be filed for a nominal amount of debt. On the other hand, a bankruptcy may be considered a good idea if there are only a few debts that could potentially bleed over to the owner in the future.
Any debt incurred for the purpose of operating a business. This could include startup costs, operational loans, credit card debts used for the business, business tax debts, equipment, services, vendors, professional fees, etc.
Personally guaranteed business loans are very common in small businesses and it must be determined by a bankruptcy lawyer how these guaranteed debts affect the individual’s financial life. In short, a guaranteed business debt is really no different than a personal debt when it comes to bankruptcy. If you are personally obligated to pay it, then a complete review of the business owner’s assets must be done to determine the best solution to the problem, which solution may include filing a personal bankruptcy (even though the nature of the debt is business).
Legally, you are personally liable for all debts as a sole proprietor even though the debts were incurred in the operation of a business.
The LLC is itself liable for the debt(s) and if those debts were personally guaranteed by the owner (or another party), then the owner or another party will also be jointly liable.
A partnership is a legal entity and it may file a Chapter 11 or Chapter 7 bankruptcy. The general partners are also usually personally liable for all debts of the partnership. Limited partners may not be liable for partnership debts unless they waived their protection by signing personal guarantees.
Yes, an SBA loan can be discharged in bankruptcy just like any other debt. The larger issue to examine is whether the SBA loan is secured or unsecured and whether there are personal guarantors that could be held liable.
A Resolution to File Bankruptcy must be proposed and voted on by the board of directors. A copy of the Resolution and its approval are normally filed with the Bankruptcy Court to show that the corporation has authority to file.
If your business is not a sole proprietorship, then only a lawyer can file a bankruptcy for the business. The reason for this rule is that only lawyers can practice law “on behalf of” another party. Normally, individuals and owners of a sole proprietorship could file their own bankruptcy. However, bankruptcy is a very specialized and complicated area of law and only a highly experienced bankruptcy lawyer should ever file a bankruptcy for a business.