Operating a small business in the current economic climate is challenging. If you are one of the many small business owners struggling to pay your financial obligations, including your creditors, you are not alone. You may be considering filing for bankruptcy. Deciding whether or not to file for bankruptcy is a daunting process.
However, it is important to remember that bankruptcy laws are written to protect entrepreneurs, small-business owners, and individual citizens. You may be concerned that you will have to stop running your business if you file for bankruptcy. With some types of bankruptcy protection, small business owners can continue operating their businesses as they go through bankruptcy.
Do I Have to Shut My Business Down When I File for Bankruptcy?
Business owners who may benefit from filing for bankruptcy may not consider bankruptcy an option because they are concerned that they will have to close their business down. After putting so much time, effort, and energy into starting and running a business, the thought of shutting it down because of debt can be overwhelming. However, filing for bankruptcy does not automatically mean your business has to be dissolved.
Some types of bankruptcy protection will allow companies to keep operating after they have applied for bankruptcy. You may be allowed to continue operating your company after your debt has been successfully discharged. Strategically filing for bankruptcy can allow you to clear up debt and restructure your business, potentially leading to a more profitable and efficient operation. Not all types of bankruptcy filings allow you to continue operating your business, so it is important that you understand your goals and make a strategic plan for filing. There are strict requirements for every type of bankruptcy filing, and an attorney can help you understand your legal options and whether your business meets those requirements.
Filing for Bankruptcy in a Strategic Way
As a small business owner, it is important that you understand the different types of bankruptcy filing so you can strategically file for bankruptcy. There are several different types of bankruptcy for which you can file, and each has its benefits and drawbacks. An experienced bankruptcy attorney can help you understand which solution will allow you to continue operating your business and provide you with the most benefits.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are popular for small business owners. They are called liquidation bankruptcies. In a Chapter 7 bankruptcy, a court-appointed trustee will sell, or liquidate, your assets and pay creditors on your behalf. Whether you will be allowed to continue operating your business after filing for a Chapter 7 bankruptcy depends on the structure of your business. For example, if you own your business as a sole proprietor, a Chapter 7 bankruptcy may be a good strategy. You will be able to keep your business operational.
If your business is a legal entity by itself, such as an LLC or corporation, you will need to file for bankruptcy on behalf of your business, not individually. Filing for Chapter 7 bankruptcy in these situations can help you liquidate your debt, but it could result in your business not being able to continue operating in its current form.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies are called reorganization bankruptcies. Only businesses owned and operated as sole proprietorships are eligible for Chapter 13 bankruptcy. When you file for a Chapter 13 Bankruptcy as a business owner, your business will be able to keep its assets and repay creditors through a repayment plan. To be eligible to file for Chapter 13 bankruptcy, you will need to show that your business’s debts are not above the limits that apply for this type of filing. An attorney can help you use specific strategies to reduce your business debts below the limits before filing. If you are a sole proprietor, you can include your business and personal debts when you file for a Chapter 7 or Chapter 13 bankruptcy.
Many businesses prefer to file for Chapter 13 bankruptcy while still making money. In these situations, the bankruptcy court will typically allow the business to keep operating as long as the business can pay a lower monthly payment on non-priority unsecured debt, such as credit cards, personal loans, and utility bills. When a business has a high inventory of products or has expensive equipment, the business may have to file a bankruptcy exemption to protect the property from bankruptcy.
Significant business assets cannot typically be exempted during the Chapter 13 Bankruptcy process. They will probably be included in the repayment plan, and the business will have to fully repay creditors for any outstanding debts within three to five years. If your business has significant inventory or expensive equipment, this will increase the monthly payment you will need to make.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is less commonly used than other forms of bankruptcy, but it can be beneficial in some cases. If you file for a Chapter 11 bankruptcy, your business will be allowed to keep its assets while paying creditors through a monthly repayment plan. Small businesses do not usually file for Chapter 11 bankruptcy because it is a complex process. Typically, a business will need attorneys and significant assets to engage in a Chapter 11 bankruptcy, making this option more appealing for larger corporations.
The benefit of filing for a Chapter 11 bankruptcy is allowing your partnership, LLC, or Corporation to reorganize and continue operating. You will not have to shut your business down after you file. If you are a sole proprietor, you may want to consider filing for Chapter 11 bankruptcy if you are interested in restructuring your business and staying open. Still, you owe too much debt to be eligible for a Chapter 13 bankruptcy. Typically, a business is only in jeopardy when a Chapter 11 bankruptcy converts to a Chapter 7 bankruptcy.