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A Bankruptcy Guide for Business Owners

A small business can fail for many reasons, and some of these reasons are beyond owner’s immediate control. Although this may not be very common, it is still important to remember that not every business will survive, and sometimes even companies that have been existing for long time hit hard times. In situations like these, filing for bankruptcy may be a viable option. Additionally, since small business bankruptcy is often linked to personal assets, thus people whose personal assets are at risk should consider bankruptcy. However, it is important to consult your local bankruptcy attorney who can help you determine the do’s and don’ts of filing for the bankruptcy. This article is written for educational purposes only and will give a brief overview of what options may be available to you which will make recovery more obtainable.

The Difference Between Personal and Business Bankruptcy

If your small business is drowning in debt, and depending on your specific situation, you can file for Chapters 7, 11,  12 or 13 bankruptcy. However, before you decide on the type of bankruptcy, you need to obtain small business bankruptcy information to clearly understand if you should file for business or personal bankruptcy. You should file for personal bankruptcy if you are liable for your assets and equipment. Therefore, if your business is structured as a general or sole proprietorship, you are personally liable for the debt. The vast majority of small business owners choose Chapter 7 or 13 to file for personal bankruptcy, but Chapter 11 is also a good option for many cases. If your business is structured as an LLC or a corporation, your business is responsible for the debt and not you. You should file for bankruptcy on the behalf of your business and can do so under Chapters 7 and 11.  However, Chapter 13 is not suitable for a business filing bankruptcy, but it can be a great option for the owners (individual persons) of the business.

Filing for Business Bankruptcy

As a business, to file for bankruptcy, you have to begin by filing a bankruptcy petition. Additionally, the business is required to file bankruptcy schedule. The bankruptcy schedule lists out the company’s assets and liabilities, income and expenses, a statement of financial affairs, and executory contracts and leases. As a business, after you file for bankruptcy, an automatic stay comes into effect. Once the automatic stay is effective, the company’s creditors are required to cease all the efforts to collect on the debts. The U.S. Trustee Program appoints a local bankruptcy trustee to administer the bankruptcy case, and the trustee oversees payments to the creditors.

Chapter 7 Business Bankruptcy

This form of bankruptcy is perfect for sole proprietorships and usually used when an owner has no hope of reorganizing the business. With this chapter a trustee will sell all business assets, including the client list and all money will go toward paying debts. All unpaid debts that are left after the liquidation are forgiven and the business no longer exists. While Chapter 7 often means the end of the business, sometimes it can also be used to get one more chance. If nobody buys the business assets and the trustee isn’t interested, a business owner can buy the assets back. Many small-business owners choose this type of bankruptcy because other options are more expensive.

Chapter 11 Business Bankruptcy

This type of bankruptcy is often used by bigger companies that need a lot of time to reorganize their business. It is the best for those who are confident they can develop a reorganization plan to help recover their company. However, if you use this method, your business will operate under increased scrutiny for a certain period of time.
Chapter 11 bankruptcy is more expensive than the previous one, but you also have more opportunity to recover than with Chapter 7. The waiting period here is four months, which is often enough to develop a reorganization plan.

Chapter 13 Bankruptcy for Business Owners (Individuals)

This type of bankruptcy is often used by personal consumers because business owners need to file a repayment plan showing how they will pay back their debts. This form of bankruptcy can help you avoid losing your home or other personal assets if your personal assets are intertwined with company assets.

Partnerships and Bankruptcy

In majority of partnerships, business owners have two options. They can either file for Chapter 7 or Chapter 11 bankruptcy. Since the Chapter 7 bankruptcy does not discharge the business debt, it is considered to be useful to the owner if they are interested in winding down a closing or failed business. In circumstances such as this, the trustee will be responsible for selling the business assets and distributing the funds. If this approach is used, the creditors carry themselves out with confidence in the debt payment process, and will likely believe they are entitled to the amount they receive. Since the partners are responsible for the business debt, filing puts the partners personal assets at risk. The trustee will be able to take each partner’s individual partners property to sell it, and use the proceeds to pay down the debt. To add to the injury, filing for the bankruptcy will not wipe out any of the individual’s personal debts.

Corporate Structures and Bankruptcy

The same rules that apply to the partnership also apply to a limited liability company and/or corporation. However, unlike in partnership, in Corporations and LLC’s, the members and shareholders are shielded, and the individual assets are not at risk. Once the matter falls under bankruptcy arena, an alter ego action can be easily brought. Under Alter Ego though by using business assets for personal purposes, someone who believes that they have been harmed might choose to bring an alter ego action to “pierce the corporate veil.” In a bankruptcy case, principal’s personal assets may be at risk. Once the matter is in the bankruptcy arena, it is relatively easy to bring the alter ego action. Therefore, if there’s a possibility of this type of litigation, the corporate officers should think twice before putting the business in bankruptcy and providing a convenient forum for an alter ego lawsuit.

Filing for Bankruptcy can be very complicated, but it does not have to be. If you are a business owner, it is important for you to keep in mind your options prior to filing for bankruptcy. Our attorneys are qualified in helping clients like you to solve all Bankruptcy related matters. Call Coleman Legal Group, LLC at 770-609-1247 today, our lawyers are here to help you with your bankruptcy related matters.