Running a small business is a dynamic journey marked by highs and lows, triumphs and challenges. Yet, when financial storms gather on the horizon, entrepreneurs often find themselves at a pivotal crossroads, contemplating a decision that can redefine the course of their business – i.e., whether to file for bankruptcy.
This critical decision requires a nuanced understanding of your financial landscape, exploring available options, and carefully evaluating the consequences that may unfold. Bankruptcy provides a means for a small business to discharge or restructure its debt, leading to financial stability. While it offers benefits, it is essential to weigh the potential drawbacks. Consulting with a bankruptcy attorney before deciding when to file for business bankruptcy is advisable.
Should I File Under Chapter 7 or 13 for My Small Business?
Once you’ve determined bankruptcy is the appropriate course of action, the next crucial decision is choosing the applicable chapter within the bankruptcy code. The two categories for businesses are:
Chapter 7 Business Bankruptcy
Chapter 7 business bankruptcy is tailored for businesses unable to meet their financial obligations, leading to the cessation of operations and revenue generation. In this scenario, the company ceases its activities and a court-appointed trustee oversees the liquidation of assets to repay creditors. All directors and employees are dismissed.
The liquidation process involves the equitable distribution of the business’s assets among creditors to settle outstanding debts. Certain personal assets are protected from seizure under federal and state bankruptcy exemption laws, providing some relief to filers. Typically used by sole proprietors, Chapter 7 offers the possibility of a debt discharge, relieving filers from personal responsibility for the debt.
Chapter 13 Business Bankruptcy
Eligibility is limited to those with unsecured loans under $419,275 or secured loans under $1,257,850. Typically used by sole proprietors, who often have fewer creditors, Chapter 13 necessitates filing under the proprietor’s name due to the absence of legal separation between personal and business assets.
Sole proprietors filing for Chapter 13 may benefit from debt discharge, allowing for the partial repayment of debts. However, when determining eligibility, the trustee evaluates personal assets and the reorganization plan. The debt limits are subject to periodic adjustments based on factors such as inflation and the cost of living.
Benefits and Drawbacks of Filing for Bankruptcy
As with any big financial decision, there are benefits and drawbacks to filing for bankruptcy as a small business. Let’s look at the pros and cons in turn.
Pros of Filing for Bankruptcy
Bankruptcy presents significant benefits for individuals burdened by substantial debt.
- Debt Elimination: Foremost among its advantages, bankruptcy provides a pathway to either eliminate your debt or establish a solid plan for repaying a portion.
- Legal Action Shield: Throughout the bankruptcy proceedings, debtors are shielded by federal courts from any legal actions that creditors may attempt to initiate.
- Property Protection: Certain bankruptcy types ensure the protection of your property, preventing it from being seized and liquidated.
- Discrimination Protection: Individuals who declare bankruptcy are afforded various protections against discrimination. For instance, businesses are prohibited from firing employees solely based on their bankruptcy filing.
Cons of Filing for Bankruptcy
While bankruptcy presents numerous advantages for small businesses facing financial strain, it should not be undertaken lightly, considering its significant drawbacks.
- Ruined Credit: Perhaps the most impactful drawback is the adverse effect on business credit. Bankruptcy information stays on credit reports for up to a decade, affecting the ability to secure loans and credit cards or make significant purchases like homes or cars. Despite its prevalence in recent years, some creditors no longer automatically disqualify individuals based on bankruptcy history, incorporating it as just one factor in their decision making.
- Property Loss: Filing for bankruptcy, particularly under Chapter 7 provisions, may result in losing some or all of your property. Non-exempt property is subject to sale to settle outstanding debts.
- Cost: The financial burden of bankruptcy includes legal and court fees, which can amount to hundreds or even thousands of dollars, contingent on the duration of the process.
- Personal Toll: Beyond the financial aspects, the emotional toll of bankruptcy can be substantial. Debtors often experience anguish and embarrassment, with the entire process, as well as the challenges leading up to it, leaving lasting emotional scars.
Small Business Reorganization Act (SBRA)
Enacted in 2019, the Small Business Reorganization Act aims to enhance the efficiency and cost-effectiveness of the small business bankruptcy process for qualifying enterprises. Key provisions of the act include:
- Streamlined Reorganization Process: The act simplifies reorganization by eliminating procedural costs and requirements associated with standard corporate restructurings. Small businesses can swiftly submit and gain approval for a restructuring plan.
- Appointment of a Trustee: For small business debtors, the act mandates the appointment of a trustee. This trustee is tasked with aiding the debtor in formulating a reorganization plan, overseeing the implementation of the plan, and ensuring its successful execution.
- Reorganization Plan Approval Authority: The act empowers the court to approve a reorganization plan despite creditors’ objections.
- Discharge Limitations: The court can grant a discharge to the debtor upon completing all payments within three years (or a court-approved period not exceeding five years), relieving the debtor of liability for debts outlined in the plan, with some exceptions.
- Residential Mortgage Modification: Unlike previous restrictions, individual small business debtors can now modify their residential mortgages. This modification is permissible if the mortgage is primarily related to the small business and not intended for acquiring the residence.
- Delayed Payment of Administrative Expense Claims: The act provides relief for debtors by allowing a delay in the payment of administrative expense claims, including those incurred for post-petition services and goods, until the plan becomes effective.
How to File for Bankruptcy
Below are the steps involved in the process of filing for bankruptcy:
1. Hiring a Lawyer
Engage the services of a Houston business attorney who will guide you through the bankruptcy filing process. An attorney will help you understand the regulations and complete the relevant forms tailored to the type of bankruptcy you are filing.
2. Filing the Necessary Forms
Use the official bankruptcy forms, accessible on the U.S. Courts website, to initiate the bankruptcy filing. With numerous filing forms and potential procedural forms, proper completion is essential.
3. Automatic Stay Granted
An automatic stay is implemented upon filing and accepting the forms by the bankruptcy court, shielding you from collection efforts.
4. Financial Education Course
After filing, embark on a financial education training course as a mandatory step in the bankruptcy process.
5. Meeting Creditors in Court
Attend a meeting of creditors, commonly called a 341 meeting, where you respond to inquiries about your assets and liabilities in a court setting.
6. Trustee Determines Assets
Following the creditor meeting, the bankruptcy trustee, representing the creditors, assesses which of your assets will be allocated to repay specific creditors.
7. Trustee Issues Discharge Recommendation
Upon settling your debts, the bankruptcy trustee issues a discharge recommendation, relieving you of legal obligations to repay discharged debts. Once the discharge is official, you are responsible for initiating the credit rebuilding process.
Can I Access Financing After Filing for Business Bankruptcy?
Banks typically do not overlook prior bankruptcies, even when launching an entirely new business. Approval for financing from these institutions usually requires a waiting period of at least three to five years after debt repayment.
In contrast, some alternative business financing firms may consider working with you as early as one year or even sooner after a bankruptcy discharge. The likelihood of approval may increase if you can offer collateral.
In essence, it is advisable to inquire about the bankruptcy policies of financial institutions before initiating financing applications.
Additionally, you can bolster both personal and business credit by acquiring business credit cards and maintaining a low credit utilization rate. Even with a business bankruptcy on your record, obtaining business credit cards is possible.
While securing financing post-bankruptcy may initially appear daunting, many entrepreneurs who have experienced bankruptcy have successfully obtained the necessary resources to launch new ventures or revive existing businesses.
How Can Weisblatt Law Firm Help You With Your Bankruptcy Case?
Facing financial challenges and contemplating bankruptcy can be a daunting experience. Having a knowledgeable and experienced legal team by your side is invaluable in such times. Weisblatt Law Firm understands the complexities of bankruptcy cases and is committed to providing comprehensive assistance to clients seeking a fresh financial start. Here is how we can help your case.
1. All-Encompassing Case Assessment
Our business attorneys will conduct comprehensive case evaluations to assess your business’s viability of bankruptcy options. Our team can provide insights into the most suitable bankruptcy chapter for your specific circumstances through a detailed analysis of your financial records, outstanding debts, and assets. This proactive approach allows us to tailor our legal strategies to maximize the benefits for your business.
2. Thorough Documentation and Representation
We will help you prepare and file all necessary documentation promptly. We will ensure that your case is presented professionally and thoroughly, reducing the likelihood of delays or complications during the bankruptcy process.
3. Strategic Planning and Guidance
We will work closely with you to develop a strategic plan for your bankruptcy proceedings. This includes creating a realistic timeline and identifying potential challenges. We are committed to proactive planning to ensure a smoother and more effective bankruptcy process.
4. Negotiation and Debt Settlement
In some cases, negotiation with creditors can be a viable alternative to bankruptcy. We are skilled in debt negotiation and settlement, working to reach favorable terms with creditors and reduce financial burdens outside the courtroom when possible.
5. Protection of Assets
Asset protection is a key consideration in any bankruptcy case. Our firm employs strategies to protect your valuable assets while adhering to legal requirements. This may involve exemptions, restructuring, or other legal maneuvers to preserve what matters most to you.
Contact Weisblatt Law Firm for Expert Guidance Today
Deciding whether your small business should file for bankruptcy is a complex and challenging process. It requires carefully evaluating your financial situation, business viability, and the potential impact on your personal life. Seeking the guidance of a Houston business attorney can provide invaluable insights and assistance in navigating this difficult decision. Contact Weisblatt Law Firm at (713) 666-1981 for a free phone consultation.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
