Filing for bankruptcy for a small business is considerably different than filing as an individual or married couple. While a sole proprietor, limited liability companies, and other corporations are entitled to seek the protection of the bankruptcy code for their business debt, there are certain factors that must be considered.
These factors determine which type of bankruptcy should be chosen to benefit the business entity.
In this article, you will learn more about the main factors business entities should consider before filing for bankruptcy with the bankruptcy court and how those factors determine which type of bankruptcy is best for small businesses. If you have questions about small business bankruptcies after reading this article, schedule your free consultation with the Law Offices of B. David Sisson.
Do You Have the Time Available to Prepare for Small Business Bankruptcy?
Small business bankruptcies are categorized as either liquidation or reorganization. To determine which is right for your sole proprietorship, limited liability company, or other business entity, you must take the time to determine whether your business has the ability to continue to operate if it is reorganized or if liquidation is the right choice for your business. This factor differs from business to business.
Chapter 11 bankruptcy and Chapter 13 bankruptcy are two types of bankruptcy available for businesses.
If a business files for Chapter 11 or Chapter 13 bankruptcy, the business is required to submit a plan that explains how it will repay its business debt.
Although these two types of bankruptcy are available as small business bankruptcies and allow the business entities to continue operating while reorganization and repayment of business debts take place, they do have their differences. Specifically, this article will continue to focus on Chapter 11 bankruptcy for business entities because of the recent passage of the Small Business Reorganization Act of 2019. You will learn more about that soon.
If your business is unable to pay creditors or continue operating, a reorganization type of bankruptcy may not be the best option. Instead, a liquidation bankruptcy may be chosen. This is generally a Chapter 7 bankruptcy. With it, business assets are liquidated to pay creditors some or all of what they are owed before the bankruptcy court issues a discharge. The business closes.
The Cost of Filing for Bankruptcy for a Small Business
Although the recent passage of the Small Business Reorganization Act of 2019 certainly made Chapter 11 bankruptcy more accessible for many small businesses, including limited liability companies and sole proprietors, filing for bankruptcy for a small business cost is still a factor. The filing fee with the bankruptcy court for Chapter 11 bankruptcy is $1,717. There are other fees that may apply, depending on the circumstances.
Your business must be able to pay creditors according to the reorganization plan developed as well as continue to pay its operating expenses. There may be some tough decisions that must be made to continue operating.
How Chapter 11 Bankruptcy Helps Small Business
Unlike individuals and married couples, LLCs and corporations do not receive a discharge in the same sense. In fact, the reorganization plan developed by the business entity that entered into a Chapter 11 bankruptcy does not need to be voted on or approved by creditors. This one difference between a Chapter 11 bankruptcy and a Chapter 13 bankruptcy.
Chapter 11 helps small businesses get through the bankruptcy process in many ways:
- It allows the business to keep operating.
- Many employees can keep their jobs. However, there could be some jobs that are lost when the restructuring takes place.
- There is no waiting period to file for bankruptcy again. After the reorganization plan has begun and the initial Chapter 11 bankruptcy is closed by the bankruptcy court, the business entity doesn't have to wait a certain amount of time to file again if they deem it necessary to do so. There are several instances of businesses filing for Chapter 11 twice. This is colloquially known as filing for Chapter 22. Some consider this small business bankruptcy as a way to reorganize again to shave off more business debt, or to liquidate and close their doors.
Small Business Reorganization Act of 2019
The purpose of the Small Business Reorganization Act of 2019 was to make a Chapter 11 bankruptcy more accessible and affordable for small businesses.
Prior to its enactment, many business entities felt their only choice was Chapter 7. With a Chapter 7 bankruptcy, business assets must be liquidated to pay creditors and the business shuts down. Of course, Chapter 11 existed, but it was extremely expensive, had different qualifications to meet, and came with a litany of reporting requirements.
Once the Small Business Reorganization Act became the law, a small business debtor became redefined to make qualifying for Chapter 11 easier. A small business entity became defined as someone or something "engaged in commercial or business activities" with 50% or more of its business debt coming from those activities. Its secured and unsecured debts cannot total more than $2,725,625. However, the CARES Act has temporarily increased this limit to $7,500,000.
Qualifying businesses receive assistance from a "standing trustee" who monitors the business entity to help ensure the reorganization stays on track. There are no creditor committee costs. The business entity must file its reorganization plan within 90 days of filing for Chapter 11, but the plan does not have to be approved by the creditors. In fact, the bankruptcy court can approve the reorganization plan even if the creditors object. Businesses can pay their administrative expenses over time as well. These expenses are usually paid on a quarterly basis.
Free Consultation: Small Business Bankruptcy
If you have a small business, there are many factors that can determine whether bankruptcy is a viable option as well as which type of bankruptcy should be chosen. Both Chapter 11 bankruptcy and Chapter 7 bankruptcy have their place, depending on your needs. Yet, the bankruptcy code can be complex. Whether you're a sole proprietor, an owner of a limited liability company, or the owner of a corporation, a bankruptcy attorney can help you understand how the unique factors involved in your situation apply.
The Law Offices of B. David Sisson offers free consultations to Oklahoma business owners who have questions about which type of bankruptcy is right for them and their business entity. To learn more about bankruptcy or the Small Business Reorganization Act of 2019 and whether your business qualifies under it, schedule your free consultation now.