Basic Rules about Business Bankruptcy

If your business needs bankruptcy help, getting it done might not be much harder than a personal bankruptcy. But it depends on how your business is set up and how much you owe.

A couple blogs ago I said that I would soon explain some of the most important benefits of filing a business Chapter 13 case. And I said we’d start by assuming that your business is a sole proprietorship. In other words, the business and you are together legally as a single entity. That is, you have NOT set up your business as a separate legal entity–a corporation or limited liability company (LLC), or a formal or informal partnership.

But first, what if your business IS NOT a simple sole proprietorship, but instead is in one of these other forms?

If so, and you want to preserve your business through some kind of bankruptcy solution, I’ve got no choice but to start by telling you that it’s time (probably past the time) to have a meeting with a competent business bankruptcy attorney.  There are advantages and disadvantages of every form of doing business. But one practical disadvantage of running your business as a corporation/LLC/partnership is that this tends to make things significantly more complicated in the bankruptcy world.

That being said, here are a few straightforward things I can tell you that will make you just a bit more prepared when you visit me or another attorney:

1. Only an “individual” can file Chapter 13. Meaning that you and your sole proprietorship can together file a Chapter 13. But a corporation, or LLC, or partnership can’t.

2. Chapter 13s are sometimes called “wage-earner plans,” probably because one legal requirement is that you have a “regular income.” But that just means “income sufficiently stable and regular to… make payments under a plan under Chapter 13.” So if your sole proprietorship business income—combined with any other income—is even somewhat stable, you may well qualify under this requirement.

3.  But even if your business IS a sole proprietorship, you and your business together CAN’T file a Chapter 13 case if your total unsecured debt is $360,475 or more, or your total secured debt is $1,010,650 or more. These may seem like relatively high amounts but remember they include BOTH personal and business debts. Also the unsecured debt amounts can include less obvious ones such as the portions of your mortgages and other secured debts in excess of the value of the collateral. So a $750,000 debt secured by real estate now worth $550,000 equates to $200,000 in unsecured debt. And that’s before even looking at your regular unsecured debts.

4. If you are over one of the above debt limits, you can still file a Chapter 7 case, but that is almost never a way to save a business. Otherwise, your option is a Chapter 11, which is a hugely more complicated repayment procedure than Chapter 13.

5. A business corporation, LLC, or partnership can file a Chapter 11 case to keep the business afloat. But because of the very high attorney fees (easily 10 times the cost of a Chapter 13), and high filing fee plus ongoing court and U.S. Trustee fees, Chapter 11 is unfortunately not a practical solution for most small businesses. One of the biggest shortcomings in the bankruptcy world is the lack of a cost-effective method to deal with small business reorganizations. Many local bankruptcy courts have tried to address this with streamlined “fast-track” Chapter 11s, but the cost is often still prohibitively high.

As I said, if you are trying to save your financially struggling business, it is very important that you get competent business bankruptcy advice, and as soon as possible. You have likely been working extremely hard at trying to keep your business alive. Now you need a game plan to start directing your energies in a constructive direction.