How Will Bankruptcy Affect My Business?

Aug 26, 2020

Many new businesses and those that have been around for some time have hit hard times lately due to the COVID-19 pandemic. That struggle to survive may permanently close a business since the forecast for recovery appears to be gloomy. In fact, new data from a poll conducted by the U.S. Chamber of Commerce suggests over 4 percent of the 30 million small businesses in the nation could go out of business permanently in the next six months.

One way to improve the financial health of your business is by filing for bankruptcy. What Chapter do you file under? Choosing a Chapter depends on your goals and the facts of your case, as no two bankruptcies are the same. An example would be if you are a sole proprietor or a partner, you are personally liable for company debts and creditors can go after your personal assets, like your home.

However, if you happen to be a limited liability company (LLC) or if you formed a corporation, you should not be liable for your business’s debts. Creditors in this situation can only go after company assets, not personal assets. The exception is if you personally guaranteed a business debt or cosigned any business debt, then you may be liable.

Bankruptcy options for businesses

Generally, a small business owner would tend to file either a Chapter 7 or Chapter 11 bankruptcy. If your business is a partnership, LLC or a corporation, you have the option of filing a Chapter 7.

Many business owners choose the Chapter 7 business bankruptcy option because they are shutting down and intend to liquidate the business. Chapter 7 does not discharge debts or use exemptions. In a Chapter 7 business bankruptcy, a trustee sells the business assets to pay creditors.

A Chapter 7 (non-business or personal) bankruptcy can be a good alternative for a business owner wanting to shut down their business but does not want to sell assets and deal with creditors If your business entity files for a Chapter 7 bankruptcy, and you personally guaranteed or cosigned any debt, then the bankruptcy does not eliminate your personal liability to pay off any of those debts.

If you are a sole proprietor, you are not able to file a Chapter 7 business bankruptcy. You would need to file a Chapter 7 personal bankruptcy because business assets and business debts belong to the business owner. A personal bankruptcy wipes out all personal and business debts and since you can use the bankruptcy exemptions in a personal bankruptcy to protect your business assets, you may not have to shut down.

This process is complicated and the best way to wend your way through a bankruptcy is to discuss your situation with an experienced bankruptcy lawyer at Melaragno, Placidi & Parini.

Chapter 11 bankruptcy option

The other option for a small business is to file for Chapter 11 bankruptcy, which is a reorganization bankruptcy. It permits business owners to continue to operate their businesses while reorganizing and paying their debts via a repayment plan.

This option is not for everyone and it largely depends on the income the business in question garners yearly, how much the debt is and what the owners may or may not have as disposable income. Chapter 11 is relatively complicated as well and at Melaragno, Placidi & Parini, we can explain the differences and provide you with enough information to make an informed decision about what you would like to do.

Small business bankruptcy Chapter 11 and Subchapter V

You may also be eligible to file a bankruptcy under Subchapter V of Chapter 11. The subchapter was added to Chapter 11 under the Small Business Reorganization Act to simplify the bankruptcy process, reduce administrative expenses and expedite the bankruptcy case.

Subchapter V took effect in February and it offers a streamlined and less costly Chapter 11 bankruptcy reorganization and applies to a business entity or person “engaged in commercial or business activities.” But what if you shut your business due to COVID-19?

A recent case in April in South Carolina, presided over by a bankruptcy judge, found that a closed small business can still seek relief under the new Subchapter V. The ruling stated Subchapter V does not depend on the small business debtor to be currently engaged in commercial or business activities when it is asking for debt relief. In other words, bankruptcy is an available option for a business that is closed. This ruling is the decision of one bankruptcy court and it is not binding on all others. That said there may be a good argument made in other jurisdictions for the same kind of ruling.

Ask us at Melaragno, Placidi & Parini about this and any other concerns you have in attempting to determine which Chapter of bankruptcy makes the most sense for you and how you wish to proceed. We are here to help.

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