Small business owners put their heart and soul into starting and maintaining their small businesses. The COVID-19 pandemic has had a significant and unfortunate impact on many small businesses. If your small business is struggling with debt, filing for bankruptcy might be able to provide some help.
Whether and how bankruptcy can help your small business depends on many factors including:
- Your goals: Do you want to close or keep your business open?
- Type of business entity: Is your business a sole proprietorship, corporation, partnership or limited liability company?
- Liability: Is there personal liability for the business debt?
- Type and amount of the debts.
This blog will discuss the three primary bankruptcy options to help small businesses like yours that are struggling to pay their bills. It is important, however, to contact an experienced small business bankruptcy attorney to discuss the best options for your particular needs and circumstances.
Bankruptcy Options for Small Businesses
There are 3 different types of bankruptcy. Which one is right for you depends on the structure and financial circumstances of your small business. Chapter 7 and 11 bankruptcy are available to both businesses and individuals, while Chapter 13 bankruptcy is only available to individuals.
Further, if you are part of the many small businesses that operate as a sole proprietorship, or if you have personally guaranteed the business debt, the line between business and personal bankruptcy becomes blurred and there may be multiple options to consider.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is an option for a business that has no viable future and has debts too large to restructure. Filing a Chapter 7 for your small business can help streamline your business closure.
The owner of a sole proprietorship is responsible for all of the assets and liabilities of the business since a sole proprietorship is basically considered a legal extension of its owner. The individual who is the sole proprietor of the small business typically files for Chapter 7 in their own name after closing the business. The benefits can be significant since the discharge will eliminate both business and personal debt. Under Chapter 7, you are generally not required to repay your creditors and can have a fresh start in as little as three to four months.
If you have more business debt than personal (consumer) debt you won’t need to take and pass the Chapter 7 means test. This means you can have a significant income and still file the Chapter 7.
Partnerships, Corporations and LLCs
If your business is a partnership, LLC or corporation, it cannot discharge its debt under Chapter 7, so the debt would remain even after the business closes. A Chapter 7 would, however, allow for an orderly liquidation of the business assets. It is important to recognize that although creditors cannot collect from a company that no longer exists, you may be personally liable for the business debt if you were a personal guarantor.
Chapter 13 Bankruptcy
Although only individuals can file a Chapter 13 bankruptcy, you might be able to use Chapter 13 if you operate your business as a sole proprietor. Chapter 13 is an option that allows individuals who operate as a sole proprietorship to reorganize debt, stay in business, and avoid asset liquidation. As a sole proprietor you would have to file for bankruptcy under your own name and not the name of the business.
There are debt limits that determine whether you are eligible to file for Chapter 13 Bankruptcy. As of April 1, 2019, you can’t have more than $419,275.00 of unsecured debts or 1,257,850.00 of secured debt to qualify. These numbers adjust periodically.
If you file under Chapter 13, you would make a plan showing how you intend to repay your debts within 3 to 5 years. As long as you have enough cash flow to continue making monthly payments under the plan, you can continue operating your business. During the repayment period you would make monthly payments to the bankruptcy trustee who oversees your case. The Trustee then pays your creditors according to your plan. Through this process you may be able to discharge some debts or pay them at a more affordable rate.
The amount paid to creditors in a Chapter 13 case is based on a variety of factors, including the type of debt, the value of assets you own and the ability to pay. Keep in mind that Chapter 13 is only available to those whose debts do not exceed certain debt limits. If your debts exceed the limit, Chapter 11 may be the right choice for your business.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy relief is for businesses that want to continue operating, but need some debt relief to do so. Chapter 11 business bankruptcy is usually used for partnerships and corporations. It is also used by sole proprietorships whose debt may be too much to qualify for a Chapter 13 bankruptcy.
A Chapter 11 bankruptcy is available to both businesses and individuals, but is far more commonly used by businesses to reorganize debt. A Chapter 11 bankruptcy allows the borrower to remain in possession of the assets and to continue to operate the business under the oversight of both creditors and the court.
Under Chapter 11, a company files a plan showing how it will repay its creditors. As part of the plan the business may terminate contracts and leases, recover assets, and repay some portion of its debts. As in Chapter 13, a Chapter 11 reorganization plan provides for repayment over time. The traditional Chapter 11 process can be lengthy, complex, and costly for the business. Recent changes to the bankruptcy code, discussed below, created a faster, less expensive reorganization path that makes Chapter 11 far more accessible for small businesses.
Small Business Reorganization Act (Subchapter V)
You may be able to save your business by filing a small business bankruptcy. The Small Business Reorganization Act commonly referred
to as the SBRA was passed by the United States Congress in August, 2019 and became effective on February 19, 2020. The SBRA can often provide a lifeline to help a struggling small business to survive. The SBRA is also referred to as Subchapter V of Chapter 11 of the Bankruptcy Code.
Debt Limits of SBRA
As enacted, the SBRA applies to businesses with debts not exceeding $2,725,625. The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) increased the debt limit to $7.5 million until at the earliest March 27, 2022. Unless further extended, the debt limit returns to $2,725,625.00.
How Does the SBRA Work?
The SBRA has made it faster, easier and less expensive to use bankruptcy to reorganize your small business. In a Subchapter V Bankruptcy, a Plan is filed which provides for catching up on missed rent, mortgage, equipment leases and/or secured bank debt. The Plan also provides for the payment of some or all of the debt owed to vendors or other unsecured creditors. The Plan must provide for payments over 3 years but if necessary, it can be extended up to 5 years. The Plan payments are made from future business income.
The Plan must be approved by the Bankruptcy Court. Once the Plan is finished, the remaining debts are discharged which means they are eliminated.
What Businesses Can Benefit from the SBRA?
A Small Business bankruptcy may be a good option for businesses that can meet ongoing obligations but need time to address past due obligations including rent and loan payments. It might be the only chance that the small business will have to continue operating and stay in its premises when facing the threat of eviction. If your small business has enough cash flow to stay open and you believe it has a viable future, filing a Chapter 11 bankruptcy may be your best option.
Contact Levitt and Slafkes Today to Get Help with Your Small Business Debt
If you are struggling with debt for your small business and don’t know what to do, give us a call today to schedule a free consultation and discuss your options. To make an appointment call us at 973-323-2953 or fill out our contact form.
We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years. The information on this website and blogs is for general information purposes only. Nothing should be taken as legal advice for any individual case or situation.