While the headlines typically focus on large enterprise-level bankruptcies, the fact is the overwhelming number of business bankruptcies are filed by small business owners. What’s more, the reasons for filing for bankruptcy can be as varied and diverse as the businesses themselves: working capital shortages, excessive supply chain costs, hyper-aggressive competition, and of course, external economic shocks like regulatory changes and recessions.
The type of bankruptcy filing is also crucially important. According to the according to The Law Office of Charles H. Huber, small businesses have three options: Chapter 7, Chapter 11 and (possibly) Chapter 13.
Filing for Chapter 7 Bankruptcy
If you file for Chapter 7 bankruptcy, your small business will immediately cease operations. A court-appointed bankruptcy trustee will be mandated to record, assess and liquidate your business’s assets, and use the funds to pay your creditors an amount that has been previously agreed upon.
While Chapter 7 bankruptcy is permanent — there is no business discharge at the end of the road – it may be a more viable or preferred option if you want the shutdown to be streamlined and transparent, and more importantly, to ensure that your creditors can’t piece the corporate veil and accuse you of failing to meet statutory procedures (of which there are many).
Filing for Chapter 11 Bankruptcy
If you file for Chapter 11 bankruptcy, you’ll become a debtor-in-possession, which means that you’ll have the powers and responsibilities of a bankruptcy trustee. Unlike the scenario described above, your business will remain operational, and you’ll have the right to obtain loans, negotiate and renegotiate contracts, file lawsuits, and so on. Keep in mind, however, that some of these activities may need court approval, and you won’t be compensated for your efforts. What’s more, the court or any creditor can seek to have you replaced by a bankruptcy trustee if they establish that doing so is in the best interest of the estate and creditors.
There are several steps involved in managing a Chapter 11 bankruptcy filing, and each one has its own specific processes and rules. Without drilling too deep, some major items on the to-do list include: creating a disclosure statement that comprehensively describes how you’ll organize and discharge your debts; getting creditor confirmation and approval of your plan; and appointing a third-party agent to pay your creditors accordingly.
Filing for Chapter 13 Bankruptcy
If you’re a sole proprietor then filing for Chapter 13 may also be an option if your debts don’t exceed statutory limits ($383,175 in unsecured debts or $1,149,525 in secured debts). The most compelling advantages are that you’ll be able to cover your existing debts with future income, and there’s no liquidation. Keep in mind that you can’t file for Chapter 13 if your business is incorporated, or if you operate in a partnership. The court also has to approve your repayment plan, and confirm that it’s viable.
The Bottom Line
If you’re seriously considering filing for small business bankruptcy, you certainly aren’t alone. It’s surprisingly common, and bouncing back is indeed possible — provided that you follow the advice of an experienced bankruptcy attorney, and do the right things the right way.