For most businesses, the type of bankruptcy will often depend upon the goal to be achieved. Are you trying to restructure the business debt or is the business hopelessly insolvent? Does the business have valuable assets? Is it viable?
First will a bankruptcy help? Second, what kind of bankruptcy? There are good and bad things in all bankruptcies. Let’s start with the type of business you own. Are you a corporation, a partnership or a proprietorship?
Corporations, limited liability companies and partnerships are legal entities separate from their shareholders or partners. They can file chapter 7 or chapter 11 bankruptcy in their own right.
CAVEAT: In a partnership's Chapter 7 case, the trustee can sue the general partners of the partnership if the partnership's assets are insufficient to pay all claims for the amount by which the partnership assets fall short of partnership debts. 11 U.S.C. 723. As a result, partners may be facing a suit by a well funded trustee suing for the benefit of all creditors of the partnership. Be very careful before filing bankruptcy for a partnership as you may be exposing partners to liability. Get good advice before contemplating a partnership bankruptcy.
- Sole proprietorship is just an extension of the owners. A sole proprietorship can't file bankruptcy alone. There is no such thing as a separate business or personal bankruptcy. The individual person must file bankruptcy, and it covers both business and personal debt since the assets and the liabilities of the business are really just one form of assets of the proprietor. The individual owner may file Chapter 7, Chapter 11 or Chapter 13 (if the debt limits are met).
Should the business be reorganized or liquidated?
Chapter 7 v. Chapter 11 or 13
- If the business is viable, and a plan is feasible, then Chapter 11 or 13 may allow you to continue to do business and get a release from burdensome debt and make your best effort to re-pay
Bankruptcy reorganization in Chapter 11 is very expensive. It is not to be undertaken without a significant cash reserves and substantial ability to repay. It is costly in terms of time and money. A reorganization can drain an already stressed organization of management's time to participate in bankruptcy proceedings and money since the legal expenses are significant.
Businesses that require little capital, have few assets, or are really just extensions of the owner's skills and personality are ones that it may not pay to reorganize. The owners may be better off liquidating the business, in or out of bankruptcy, and starting over in a fresh entity. This can be a complex issue and requires good professional advice to do correctly.
When Chapter 7 is best
A Chapter 7, whether for the individual or a corporation, may be the best choice when
- the business has no future, or is hopelessly insolvent
- it has no substantial assets or qualities that cannot be reproduced after bankruptcy, or
- the debts are so overwhelming that restructuring them is not feasible.
Individuals can get a discharge of the dischargeable debts and a chance to start over.
Corporations don't get discharges, so a corporation won't get a fresh start in a Chapter 7, the way an individual does. Nonetheless, a Chapter 7 can provide an orderly liquidation under the direction of the trustee and at no expense to the shareholders. Creditors are assured that they will be paid to the extent of the assets available and the priority of their claim.
Dana A. Ehrlich can help you evaluate those options. He has lived in the ConchoValley and San Angelo, TomGreenCounty for many years. His practice is primarily consumer bankruptcy law and he is a board certified bankruptcy specialist for Chapter 7 and Chapter 13. He may be reached at 325-655-5351 or at email@example.com.