The economy remains topsy-turvy. Inflation, supply chain disruptions, and a skilled worker shortage have combined to put pressure on company balance sheets. Despite their best efforts, many business owners are staring in the face of bankruptcy. When you just can’t balance the books anymore to keep the lights on, it might be time to call it a day.
There are various kinds of business bankruptcies. Some are more appropriate for a business depending on the company’s size and structure. For assistance choosing which bankruptcy is right for you, contact the Law Offices of Scott J. Goldstein today. He is an experienced New York business bankruptcy attorney who can shepherd your case through the process.
Chapter 7 Liquidation
If your business cannot recover from its financial difficulties, then it’s probably time to liquidate. The bankruptcy trustee will collect all business assets and sell them to the highest bidder before distributing most of the proceeds to creditors. A small number of assets might be “exempt,” meaning the creditor cannot sell them. And assets with a lien might not be sold.
At the end of the process, business debts are eliminated. You can typically continue to operate for a brief period of time, but ultimately you will shut down.
A business benefits from the automatic stay, which springs into effect once you file for bankruptcy protection. The stay halts all enforcement actions on the debts. The stay makes liquidation orderly and ensures no creditor “cuts in line” and gets a larger share of your company’s assets ahead of other creditors.
Highlights of a Chapter 7 business bankruptcy:
- Appropriate when you are shutting down a business permanently
- A trustee handles the liquidation of assets
- Debts are eliminated at the completion of bankruptcy
Chapter 11 Debtor in Possession
This is another business bankruptcy, and it’s an option for those who want to keep their company going. Bankruptcy helps you reorganize your current debts and pay them off partially so that they no longer weigh down your balance sheet.
With a Chapter 11, the business continues to operate, but it enjoys the protection of the bankruptcy court. Consequently, your creditors cannot sue you or take collection actions. Instead, you work to come up with a plan that reorganizes your debts. Some priority creditors will receive 100% of what they are owed, but others will probably receive pennies on the dollar.
This type of bankruptcy is a “debtor in possession” because the owner essentially plays the role of trustee. Creditors have an important role to play in Chapter 11, also. The largest unsecured creditors are appointed to a creditors’ committee, which can help create a reorganization plan. They might even veto the plan the debtor in possession proposes. Nonetheless, a judge has the power to impose the plan over the objections of creditors.
Historically, Chapter 11 was only appropriate for large companies because the paperwork requirements were cumbersome. But recent changes to bankruptcy laws have simplified Chapter 11 for small businesses. A small business case has quicker deadlines and a faster process for approving plans.
Highlights of a Chapter 11 business bankruptcy:
- The debtor in possession essentially plays the role of trustee
- Appropriate for businesses that want to continue in operation
- Reorganizes debt and usually forces unsecured creditors to take a haircut
Special Considerations for Sole Proprietors
Many businesses are organized as sole proprietorships. In this business form, there is no meaningful separation between your personal assets and your business ones. For that reason, it’s possible to lose many personal assets if you choose to enter bankruptcy because the trustee can take assets and liquidate them.
A sole proprietorship can use a Chapter 7 or 11. They can also use a Chapter 13 bankruptcy, which we discuss next.
Chapter 13 for Sole Proprietors
This bankruptcy is not available for most businesses. Corporations, partnerships, and LLCs cannot use it. However, it’s an option for a sole proprietor. You can continue to operate your business as you work on paying off your debts.
As with other bankruptcies, you gain the benefit of the automatic stay, which prevents creditors from taking actions against you to collect on debts. Based on your income, you will create a repayment plan that lasts 3 or 5 years. During this time, you will put your disposable income toward your creditors, and at the end of the process, any unpaid debt is eliminated.
Highlights of a Chapter 13 bankruptcy:
- Only appropriate for sole proprietorships
- You will not lose any assets so long as you keep to a 3-5 year repayment plan
- At the end of the plan, any unpaid debts are wiped out
A Lawyer’s Role in Business Bankruptcies
A trusted legal advisor has a huge role to play in business bankruptcies. Without the right lawyer, you could seriously impair your personal finances.
Perhaps the most important role is to help you choose the right bankruptcy. There is no reason to file for a Chapter 11 bankruptcy only to realize a month down the road that it’s the wrong one for you. Attorney Goldstein can review your business and help you choose the best option based on your goals.
A lawyer can also help any business in a Chapter 11 create a schedule of liabilities and a plan of reorganization. Even a Chapter 11 small business case requires paperwork that is foreign to most business owners. Let Attorney Goldstein handle the legal issues while you focus on growing your business.
Many issues also arise in Chapter 7 or 13 cases. For example, you might disagree with the trustee about whether property is exempt and need to have a judge decide. An attorney will present your legal case in court.
FAQs about Business Bankruptcy
Can a debtor receive new financing?
It’s possible in a Chapter 11 if you receive court approval. Because your business will continue to operate, it might make sense to take on new debt. In a Chapter 7, you are liquidating the business, so obtaining new financing is not appropriate.
I’m winding up a business down anyway; do I need to file for bankruptcy?
Bankruptcy will eliminate debts. Simply winding up a business does not do that. In fact, you might find that your business is involved in lengthy litigation even after you think you’ve turned the lights off. One way to avoid this scenario is to file for bankruptcy to eliminate debts you can’t pay when winding up.
Can I wipe out personal debts in a business bankruptcy?
Yes, if you are a sole proprietor. This is why it is vital to meet with someone experienced with personal bankruptcy as well, like Attorney Goldstein. A sole proprietor with considerable personal and business debts could set themselves up well to flourish if they file Chapter 7 or Chapter 13.
How long does a business bankruptcy take?
It really depends on the size of your business. A large business with stores in many cities will take longer to liquidate. Similarly, if you have large business debts, a Chapter 11 could take much longer as creditors wrangle about your planned reorganization.
Contact Our New York Business Bankruptcy Attorney
Deciding to file for bankruptcy is difficult. However, it is often the best step when business debts are overwhelming you. Whether you want to keep a business operational or shut the doors forever, there is a bankruptcy which is right for you. To learn more, contact our law firm today. Our New York business bankruptcy lawyer will help you determine how you want to proceed. Call 973-453-2838 to schedule a consultation.