Bankruptcy Options for a Small Business Owner
If you have a business and you are unable to pay your creditors, bankruptcy may provide some relief. Whether it is a small business, corporation, DBA, or sole proprietorship there are several considerations and planning that is needed before filing. There are several Bankruptcy options for a small business owners who can not pay back their debt, the opportunity to settle their debts and avoid collection law suits.
Chapter 7 ,13 and 11:
Under the U.S. Bankruptcy Code Chapter 7 and Chapter 13 primarily apply to individuals. This includes small business owners who operate as a sole proprietorship. Chapter 7 bankruptcy will allow business owner’s to file under his/her name and eliminate most business debts that he/she is unable to pay. These debts include personal guarantees by small business owners. The bankruptcy trustee will sell assets that are not exempt to satisfy outstanding debts and discharge the remaining debts. Under a Chapter 13 bankruptcy, the trustee will set up a three to five year repayment plan for the debtor to repay debts from current income. The debtor will be allowed to keep assets under a Chapter 13 plan.
Chapter 11 cases under the Bankruptcy Code apply to both individuals and small businesses. The business will continue to run but will be under scrutiny of the trustee. However, Chapter 11 may afford an excellent plan to continue to operate the business and negotiate with creditors.
Small Business Owners (Considerations before filing):
A. D.B.A and continued business after filing:
The most important factor a small business owner has to make when considering filing for bankruptcy is whether they want to continue to operate the small business. A small business owner who plans to continue to operate the business may risk having their business shut down by the trustee, temporarily closed or even in some situations the trustee may take over the business. Typically the trustee will allow the business to operate if the business is a service. For example, an accountant who has an office and is a sole proprietorship will likely not be effected by a chapter 7 bankruptcy. An accountant most likely will not have very many assets or liability in the business. This holds true for others such as real estate agents, or attorneys. Similarly if you are a general contractor and sole proprietor, the trustee will likely not be interested in the business besides non exempt assets.
However, if you are retail store or a restaurant, you may have non exempt assets and liability. For example, a restaurant owner usually has employees, liability that needs to be covered by insurance and assets that are probably non exempt. The trustee may want to shut down the small business for several reasons. First, the trustee will not want the restaurant to accrue more debt and liability and second, all of the restaurants assets may not be exempt and can be sold to benefit the creditors.
It is important that you speak with an experienced attorney about how a bankruptcy may effect the small business’s ability to continue after the bankruptcy.
B. D.B..A and Cease of Business after filing
A small business owner who has decided to shut it’s doors can benefit greatly from a Chapter 7 bankruptcy. A small business bankruptcy will allow the discharge and release of an individuals personal liability for all of their dischargeable debts and prevent creditors from attempting to collect those debts from the debtor. Liquidation of the business assets if non exempt, is court supervised, orderly and usually precludes creditors and claimants from crying foul about the liquidation process. The small business owner is saved time from liquidating the assets by him or her self.
Corporation and Bankruptcy
Owners of a struggling business may be incorporated and want to file the bankruptcy under the corporation’s name. There is no great benefit for filing a bankruptcy under a corporation. Only individuals are entitled to a discharge under the bankruptcy code. Furthermore, the purpose for filing a business bankruptcy is to eliminate any personal liability the business owner may have and this can only be accomplished by filing with the individuals name.
I will be posting more posts regarding small business owners and bankruptcy in the near future. Our office is located in Orange County California in the city of Tustin and represents individuals and businesses .