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The first several years of owning a business are tumultuous. According to data from the Small Business Administration, roughly a third of businesses fail in the first two years, and only half of businesses survive the first five.
If your company is fighting to stay afloat, deciding on a course of action can be challenging. Do you keep taking on more debt, hoping your business will soon become profitable? Do you put your personal assets on the line? Or do you liquidate your company, believing a profitable future is no longer possible?
Understanding your bankruptcy options can help you make a fully informed decision. Each year, innumerable business owners use bankruptcy to either liquidate their companies in a transparent manner or restructure their debt and remain fully operational. Here is a brief overview of how each type of bankruptcy may affect your business.
Chapter 7 is an option for business owners who want to free themselves from the burden of their struggling companies.
However, filing for Chapter 7 as a business entity is risky and often ineffective. This is because Chapter 7 does not grant debt discharges for business entities like partnerships, LLCs, and corporations. It can also encourage lenders to file lawsuits in an attempt to pierce the corporate veil (i.e., hold you personally responsible for business debts, despite limited liability).
This is why many business owners—especially sole proprietors—choose to file a personal Chapter 7 case. If you’ve signed personal guarantees for your business debts, Chapter 7 may be able to eliminate your liability for that debt. As a sole proprietor, you can even protect your company assets using exemption laws, meaning you can reduce your debt without going out of business. Challenges may arise, however, if your business depends on costly equipment or supplies, which the trustee may liquidate.
Chapter 13, unfortunately, is only available to individuals. If you own a business, you can only include your business debt in your Chapter 13 plan if you are a sole proprietor, as sole proprietors are personally liable for their business debt.
Chapter 11 didn’t use to be a viable option for businesses of all sizes. Because of the exorbitant costs, time-consuming process, and amount of power given to creditors, only corporations and large companies have been able to successfully restructure and retain control over their businesses through Chapter 11. If you are hoping to file as a corporation, you may have the resources you need to reduce debt through Chapter 11 without going out of business.
However, these benefits may extend to smaller businesses due to a recent addition to the Chapter 11 code: Subchapter V. Only small businesses with up to $2,725,625 (or up to $7,500,000 until March of 2021, per the CARES Act) can qualify for Subchapter V, and it eliminates many of the legal and financial obstacles of traditional Chapter 11.
For example, Subchapter V filers don’t need to file disclosure statements or obtain repayment plan approval from creditors. Additionally, the repayment plans are generally limited to 3-5 years, as is the case with Chapter 13. If you file under Subchapter V, you can likely reduce your financial liabilities while retaining full control over your business.
Looking for more personalized information about how bankruptcy might affect your business? Turn to Bach Law Offices, Inc.. Our experienced attorneys can help you understand your options, how bankruptcy works, and what you can expect from the process. Whether you want to liquidate your company or rescue it from financial ruin, our team can help you develop the plan you need to succeed.