Can Bankruptcy be a Solution for Saving Your Small Business?

Can Bankruptcy be a Solution for Saving Your Small Business?Unfortunately, the COVID-19 pandemic took a serious toll on small businesses and has left many struggling to pay their bills, let alone turn a profit. Filing bankruptcy can be a viable solution to save your business, but it is vital to ensure that it is the right option for your circumstances. Before making such a big decision, consulting local bankruptcy attorneys who are well-versed in commercial bankruptcy law can help you make informed decisions.

Deciding Whether to File For Bankruptcy

It is important to keep in mind that there may be other options to keep your business solvent and turn things around before filing bankruptcy. Doing a thorough assessment of your financial circumstances and thinking about your goals is critical. If you are considering bankruptcy, first ask yourself the following questions:

  • Do you want to keep your business open or are you ready to close it?
  • What type of business structure is your company: sole proprietorship, partnership, corporation, or limited liability company?
  • If it is a partnership or corporation, are you personally liable for any business debts?

You should also look at the types and amounts of debt you owe. Compiling this information and bringing it to your consultation with bankruptcy lawyers can help them evaluate your circumstances and determine which type of bankruptcy may work best for you.

Small Business Bankruptcy Options

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a liquidation bankruptcy that is available to both individuals and businesses. Business dissolution lawyers may recommend filing Chapter 7 for small business owners who want to close up shop and get out from under debt.  Typically, a person who is the sole proprietor of a small business can file for Chapter 7 in their name.

Chapter 7 can provide significant benefits, as it eliminates certain types of business and personal debt and can give you a clean financial slate in a matter of months. In addition, if you have more business debt than personal debt, you will not be required to take the means test and can file Chapter 7 even if you have significant personal income.

Filing Chapter 7 as an LLC, partnership, or corporation allows for an orderly liquidation of the business assets but does not discharge your debts for which you are personally responsible. If you were a personal guarantor of any business debt, you may still be liable for it.

Chapter 13 Bankruptcy

Chapter 13 is a reorganization bankruptcy that may be filed by someone who operates their business as a sole proprietorship. If you want to stay in business, it can enable you to avoid asset liquidation and reorganize your debt, which is paid back over a period of 3-5 years.

As of June 2022, you may have up to $2.75 million of secured and unsecured debt to qualify for Chapter 13 bankruptcy. If your debts exceed the limit and you want to keep your business open, Chapter 11 may be the right choice for you.

Chapter 11 Bankruptcy

Typically used by corporations and partnerships, Chapter 11 is a business reorganization bankruptcy that allows you to retain possession of your business assets and to continue to operate under the oversight of creditors and the court. Much like Chapter 13, a Chapter 11 reorganization enables you to repay your debts over time. In Chapter 11, your business must file a plan that shows how creditors will be repaid.

The traditional Chapter 11 process can be complex, lengthy, and costly, so it was not a practical option for many small businesses in the past. However, recent changes in the bankruptcy code have created a faster, more economical process that makes Chapter 11 accessible to more small businesses.

The Small Business Reorganization Act (SBRA)

Passed by the U.S. Congress in 2019, the SBRA can offer a lifeline for small businesses that are struggling. It may work well for those that can meet ongoing expenses but need time to address past due obligations such as rent and loan payments.

For example, because bankruptcy puts an automatic stay on debts like past due rent, it can stave off the eviction process and allow you to continue operations in your location while you catch up through your Chapter 11 repayment plan. In both Chapter 11 and Chapter 13, you may only have to pay a portion of your debts, and once your repayment plan is finished, remaining debts are discharged.

Our West Chester bankruptcy lawyers understand that it can be overwhelming to decide what to do when your business is in trouble. We can take some of the weight off your shoulders and guide you through all your options.