How to Determine Which Bankruptcy Is Right for Your Business
Hundreds of businesses are started every day, but many of them are unable to break into the market, and it’s also common for thriving businesses to experience a quick and sudden decline in revenues to the point where the only solution left is to file for bankruptcy. For the past four years, over 20,000 businesses have filed for bankruptcy per year. No matter the reason that you’re considering filing for bankruptcy, it can be useful to consult with a bankruptcy attorney to assist you in the process.
What Chapter 7 Bankruptcy Entails
To fully understand each of the three business bankruptcies, you should first know that Chapter 7, 11, and 13 bankruptcies are open to sole proprietors, with Chapter 7 and 11 bankruptcies being available for corporations and partnerships. Chapter 7 bankruptcy is designed to be used by companies that have no means of continuing to stay in business. In this case, the debts that you have racked up may be too large to even consider restructuring the business. This type of bankruptcy is also commonly used by small businesses that do not yet have a large number of assets.
When you file for this bankruptcy, your business will be unable to continue operating, which is why it’s important that you have considered all of your options and believe that this is the only one left open to you. The assets that you currently have will be sold by the bankruptcy trustee, to create a fund of money to be sent to your creditors as a means of repaying at least some of your debt.
If you are sole proprietor, you will have to file bankruptcy personally, since your assets and the business assets not legally separate. In this situation, you must list your personal debts and assets along with those of the business, and will receive a discharge of both.
If your business is a Limited Liability Company or corporation, it must file its own bankruptcy. In this case, there is no discharge, but the bankruptcy frees you as the owner of the duties and obligations of selling, accounting for and disposing of the business assets, or dealing with unpaid creditors. Instead, the Trustee takes on this role. More significantly, all the creditors get official notice and will commonly cease collection efforts. However, if you have personally guaranteed business debts, or the business has unpaid payroll or sales tax obligations, you as the owner will remain personally liable for those debts.
What Chapter 11 Bankruptcy Entails
Chapter 11 bankruptcy is a unique type that focuses on the reorganization of the business in an effort to turn the business around. This bankruptcy type is mainly used by businesses that believe they have some type of future, or where there is another good reason to keep the business under your control for a period of time. When you file for this type of bankruptcy, a trustee is not appointed in most cases. Instead, the company owners and management are allowed to continue operating the business, under court supervision, as a “trustee” for the benefit of creditors. In this situation, the business must file monthly operating reports, obtain court approval of many types of business decisions, including hiring bankruptcy attorneys or other professionals, and must pay quarterly fees to the United States Trustee.
Subject to court and creditor approval, the business management must work towards approval of a plan that specifies how and when creditors will be paid for the debts that are still owed. A Disclosure Statement must be prepared that details the company background and finances, describes the Plan and explains why creditors should vote for the plan. After court approval of this Disclosure Statement, the debtor submits the Plan with the Disclosure Statement for balloting and approval. The bankruptcy court makes a final decision about whether or not the Plan can be confirmed. The amount of time laid out in these plans for paying back creditors can range anywhere from three years to more than 20. There are many types of plans, from those that simply wind down the business in an orderly fashion, to those simply sell all assets, to those that propose a full-blown reorganization of the business. After Plan Confirmation, the business continues, with the obligations set forth in the plan replacing the pre-petition debt obligations.
What Chapter 13 Bankruptcy Entails
Chapter 13 bankruptcy is a personal bankruptcy and is only available for sole proprietors with debt under specified limits. Again, you as the business owner file bankruptcy personally. You will create and send a repayment plan to the bankruptcy court that will outline the ways in which you will pay back any creditors that you have. This type of bankruptcy can be used by small businesses that have some of their personal assets mixed in with their business assets.
How We Can Help
Here at Neuner & Ventura LLP, we have experience with all types of bankruptcy, which means our bankruptcy lawyers can help guide you along your case to ensure that you’re making the right decision and that you’re wholly confident about the type of bankruptcy you’re filing for. Filing for any type of bankruptcy is a difficult decision for small businesses and corporations alike, which is why it’s essential that you have all of the facts before doing so.
When you are faced with the possibility of filing for bankruptcy, call us at (856) 596-2828 at our office in Marlton to schedule an appointment with our New Jersey bankruptcy attorneys so that we can help you decide which steps you should take next.