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3 Things to Consider When Your Small Business Can’t Pay its Debts

On Behalf of | Sep 12, 2022 | Business & Commercial Bankruptcy

As a result of COVID-19, difficulty in hiring, and other economic factors,  many small businesses have closed. There are even more businesses that can’t meet ongoing expenses and are taking on more debt to try to stay open.

The hard question a struggling small business owner must ask is whether to try to save their business or close their doors forever.

The following are three factors  small business owners like you should consider when trying to decide what to do next.

1) Negotiate with Your Creditors

If you can’t pay your rent and your ongoing bills, you might consider negotiating with your landlord and your other creditors. You should try to negotiate before they sue you because once a judgment is entered it may be too late to save the business.

As soon as possible you should contact your landlord, lenders and other creditors to see if they will make payment arrangements based upon your available income. If possible, try to make your creditors your partners and not your adversaries. At this time, and depending on the creditor or landlord, they may be willing to negotiate to get some payment, as they too may be struggling.

Negotiating with your creditors may give you the time you need to rebuild your business and ultimately pay off the debts either in full or in a compromised amount.

2) Explore Whether a Small Business Bankruptcy Can Save Your Business

If the negotiations with your creditors are unsuccessful, filing a small business bankruptcy might help you save your business.

The Small Business Reorganization Act (“SBRA”) was passed by the U.S. Congress and became effective on February 19, 2020. The SBRA can often provide a lifeline to help a struggling business to survive.

  • What is the SBRA?

The SBRA, created a more efficient and less expensive way for small businesses to reorganize under Chapter 11 of the United States Bankruptcy Code. The SBRA, is also known as Subchapter V of Chapter 11.  A bankruptcy under the SBRA might help your business reorganize and remain open.

  • What are the Debt Limits of the SBRA?

A business that has total debt of $7.5 million or less qualifies to file under the SBRA.

  • How Does the SBRA (Subchapter V Bankruptcy) Work?

The SBRA has made it easier, quicker and less costly to reorganize your small business through bankruptcy.

Here is the overall process:

In a Subchapter V Bankruptcy, a Plan is filed which provides for you to catch up on missed rent, mortgages, equipment leases and secured bank debt. The Plan also provides for the payment of some or all of the amounts you owe to vendors or other unsecured creditors.

The Plan must provide for payments over a period of 3 years. If necessary, the Plan can be extended to up to 5 years. The Plan payments are made from future business income.

The Bankruptcy Court must approve the Plan. In some cases, the Court can approve the Plan even if the creditors do not agree with it.

After the Plan is completed all remaining business debts are discharged. Discharged debts are no longer owed.

  • What Businesses Can Benefit from the SBRA?

Small Business bankruptcy may be a good option for a business that can meet its ongoing obligations, but needs time to deal with past due obligations including rent and loan payments.

The SBRA might provide the only chance for a small business that is threatened with an eviction judgment to stay in its premises and continue to operate.

3) Close Your Business

If all efforts to keep your business open have failed, your only remaining option might be to close the business.

The following are 4 possible ways to close the business.

  • Surrender Collateral to Secured Lender

If all of your business assets are pledged to a bank to secure a loan, contact the lender and surrender the assets. Any other debt will remain only against the insolvent business unless the owner has personally taken on the debt.

  • Pursue an Assignment for the Benefit of Creditors

An Assignment for the Benefit of Creditors (ABC) is used to accomplish an orderly liquidation of a business that has valuable assets with little to no secured debt.

An ABC is similar to a bankruptcy liquidation but is governed by state rather than federal law. The ABC process begins by the business executing a deed transferring all of its assets to an Assignee. Once the Assignee records the deed, the assets are liquidated, creditors are invited to submit claims based on the outstanding debt owed, and, ultimately, a distribution is made on the creditor claims.

Other than signing the deed and cooperating with the Assignee, the small business owner has no further obligations regarding the business.

  • Close the Doors and Walk Away

If the business has no assets and there are insufficient funds to continue operating, the business can just be closed. The business owner is not obligated to pay the business debts unless they have personal liability for the debts which is often obtained by a personal guarantee.

Creditors whose claims are not paid may pursue collection efforts against the business, but they will not receive any payment.  If the owner is personally liable the creditors can pursue collection efforts against the owner.

  • Chapter 7 Bankruptcy

Only a business which is a sole proprietorship should consider filing a Chapter 7 bankruptcy because only individuals can obtain a Chapter 7 discharge. Corporations and LLCs cannot. The discharge is the Court Order which eliminates debt. Since business entities are not entitled to a Chapter 7 discharge, there is no reason to pursue that process.

If you as a business owner are personally liable on the debt you might consider filing a Chapter 7 bankruptcy.

Contact Levitt and Slafkes Today to Get Help with Your Small Business Debt.

If you are struggling with debt for your NJ small business and don’t know which road to take, 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 a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

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.