Your young tech startup is on the skids. Things were going well for a couple of years but now you have mountains of debt and not enough business coming in to cover the payments each month much less operating expenses. You think to yourself, I might have to file bankruptcy! But how do you know whether bankruptcy is the best option for you? And what form of bankruptcy filing is most appropriate for your situation?
I spoke with Philadelphia bankruptcy attorney David Offen, Esq. who reports that business bankruptcy is much more complex than personal bankruptcy and that the repercussions of filing bankruptcy can be very different depending upon:
- the way your business is organized;
- your plans for the future;
- the type of bankruptcy you file;
- what type of debt you have;
- under which bankruptcy chapter you file.
Read on to learn about the different types of bankruptcy filings and the potential ramifications of each upon different business types.
Three Considerations When Deciding Whether To File Business Bankruptcy and What Type
How Did You Structure Your Business?
Are you a sole proprietor? Did you incorporate? Do you have partners? Do you have a single-member LLC or a multi-member LLC?
Sole proprietors can file Chapter 13 bankruptcy; LLCs (in most states) and corporations cannot.
Take note: if the business in question is a sole proprietorship or general partnership, owners are personally liable for your business debts, and if the owners are limited partners or the business is a corporation or LLC (in most states), owners are not personally liable.
What Are Your Plans for the Future?
Even if your debt to income ratio is pointing you in the direction of a bankruptcy filing, you need to determine whether you plan to continue operating the business, or you are okay with liquidating your assets and paying off the debt.
Your answer to this will dictate whether bankruptcy is for you and which type of bankruptcy will help you achieve your goals.
What Type of Debt Do You Have?
There are two types of debt – secured (debt for collateral like equipment, stock, and technology) and unsecured (credit cards, medical debt, personal loans).
There is also priority debt like fees, fines, taxes, pensions, etc… but the treatment of these in bankruptcy is outside the scope of this article and should be addressed by an experienced business bankruptcy professional.
Generally, business bankruptcy allows for the discharge of all or some of the unsecured debt and allows for renegotiation of secured debt or orderly surrender of the collateral with no liability on the part of the debtor.
The kind of debt your business has and whether you are personally liable for that debt is another factor to consider when contemplating bankruptcy.
Three Types of Business Bankruptcy
Chapter 11 Business Bankruptcy
For companies organized as anything other than a sole proprietorship that intend to continue operations rather than liquidate, Chapter 11 is the only option.
This is the type of bankruptcy filed by major corporations, and small businesses must follow most of the same rules and procedures. However, if your business owes less than $2.5 million dollars, you can file as a “small business debtor,” which fast-tracks the filing.
Regardless, a Chapter 11 bankruptcy filing is complicated. To file a business must disclose its most recent balance sheet, statement of operations, cash flow statement, and federal tax return. The business must also develop (and have approved) a reorganization plan that shows how it will recover; be able to make monthly payments to creditors, and; be subject to strict oversight by a trustee during the repayment period.
Chapter 7 Business Bankruptcy
Chapter 7 bankruptcy is a 4-6 month process by which a debtor (a person, or a business entity) discloses all income, expenses, assets, and debts to the court and the Chapter 7 Trustee. The automatic stay is in place the moment of filing, meaning, all creditor actions against the debtor. Once the debtor is determined to be deserving, the debtor is discharged of all unsecured debt.
Because it is an asset liquidation action, a business that files under Chapter 7 cannot continue business operations. Corporations, Partnerships, and LLCs can use Chapter 7 bankruptcy to liquidate the company in an orderly fashion, but these business types do not qualify for exemptions. However, if a sole proprietor files a personal Chapter 7, exemptions can be used to protect business assets.
If a business owner is personally liable for business debt, that individual is not protected by the business Chapter 7 filing and you will remain liable for those debts after your business receives a discharge.
Chapter 13 Business Bankruptcy
Chapter 13 business bankruptcy is generally not available for businesses, except…
Sole proprietors are considered one and the same as their companies and may file bankruptcy under Chapter 13. If you are a sole proprietor, you can use Chapter 13 bankruptcy protection to retain your non-exempt assets, renegotiate your secured loans, wipe out both business and personal non-priority debts, and pay off such priority obligations as business and personal taxes.
Chapter 13 is a debt restructuring program. You must develop and execute a repayment plan lasting 3 to 5 years and then complete that plan in order to receive a discharge of your debt.
Consult With An Attorney to Explore Your Options
Determining whether to file bankruptcy and which type of bankruptcy to file is a big decision that should not be undertaken lightly. You should consult with an experienced business bankruptcy attorney who can help you weigh your options, gather and file all needed documents, and ensure that no unintended consequences occur.