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  • Writer's pictureMarshall Reissman

Small Business Bankruptcy

To File or Not To File?

Despite the economic upturn, many homeowners and small business owners are struggling to maintain their home and livelihood.

People or businesses file bankruptcy to seek relief from the pursuit of creditors and to absolve debt. The foundation of the bankruptcy laws is built upon the ideas of a “stay” or an order keep creditors at bay while the debtor seeks relief, and a “discharge” or forgiveness of debt.

Generally speaking, there are three types of bankruptcy. Deciding which type of bankruptcy is best for you or your business is tricky and should not be undertaken without the help of a bankruptcy attorney. Chapter 11 bankruptcy can either be a “reorganization” or a “liquidation.” Individuals with large amounts of debt and significant income may file Chapter 11, but it is mostly used for business reorganization. Chapter 11 is designed, in large part, to help those businesses whose cash flow is immediately consumed by debts. A Chapter 11 business bankruptcy restructures those debts and can significantly reduce the principal and interest rate of most secured and unsecured debt.

Chapter 11 bankruptcy filings have more requirements than any other type. The Chapter 11 debtor is required to have up-to-date liability insurance on all of its facilities. The debtor must also have adequate insurance on equipment and inventory. There are numerous items that must be filed with the court at the beginning of the case. The debtor must file detailed monthly operating reports and make payments to the United States Trustee, the entity that oversees the Chapter 11 case. There are many more requirements that make a Chapter 11 filing expensive and time consuming, and therefore, unavailable to the average small business owner. Many small business owners cannot afford to hire an attorney and undertake the Chapter 11 process. However, there may still be help available to the person and the business through another type of bankruptcy.

Chapter 11 is usually not a feasible option for most of the business owners in America who own what has been affectionately referred to as “Mom and Pop Shops.” Those who own a Mom and Pop Shop might think that bankruptcy is not available because when most people think of a business filing bankruptcy they usually think of a Chapter 11 bankruptcy like the one General Motors went through. However, there may be other types of bankruptcy available to the Mom and Pop Shop business owner. Chapter 7 bankruptcy is a “straight” or “liquidation” bankruptcy. Usually the debtor will be relieved of his or her debts and still be able to keep most, if not all, of his or her property. The Chapter 7 liquidation bankruptcy is also available to businesses. In reality, if a business files a Chapter 7 bankruptcy it is analogous to the “fat lady signing at the opera” … it’s over. The reason a business may decide to file a Chapter 7 is to put all creditors on notice that the business is dissolving and to stop all lawsuits. The business Chapter 7 is often followed by an individual bankruptcy to take care of all the personal guarantees the business owner may have.

Chapter 13 bankruptcy is known as a “rehabilitation” instead of a “liquidation” because the debtor is committed to a partial or full repayment to creditors over three to five years. The Bankruptcy Code states that a corporation or L.L.C. cannot file for Chapter 13 bankruptcy but the principals or owners of the business may file and continue to run the business while restructuring their personal debt. Most people with Mom and Pop Shops supplement the financing of their business through the use of personal credit cards, which do not reflect as a debt incurred by the business itself. Thus, the debtor may file an individual Chapter 13 to help restructure their personal debt and perhaps the debt they incurred due to the business they own, while still operating the business. This, in effect, will restructure the debt of the business without the business itself having to file a bankruptcy. It must be noted that if an individual files a Chapter 13 bankruptcy the business they own will still be liable for the debts in the name of the business, but the individual debtor should be absolved of any personal guarantees if the bankruptcy is completed successfully.

A Chapter 13 bankruptcy is much less complicated, less costly, and does not have nearly as many requirements as a Chapter 11 bankruptcy. Some business owners have companies that are too large for this type of rehabilitation. If they want to restructure debt and continue to operate, they must file a business Chapter 11. There are many factors that go into deciding which chapter a business should file under and bankruptcy counsel should be consulted to explore all possibilities. The bottom line is that good decisions are based on good information and there may be light at the end of the tunnel.

If you are looking for a bankruptcy attorney in St. Petersburg, call us today. We can help!



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