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Protecting Yourself When Your Business Has to Throw in the Towel

If you’re seriously considering closing down a struggling business, you are likely very concerned about personal damage control: how do you end the business without being pulled down with it?

My last blog was about saving your business through a Chapter 13 case. I can explore that option with you when you come in to see me, but let’s assume here today that either before or after talking with me you’ve made up your mind to close the business. And let’s keep it simpler by assuming that your business is or was a sole proprietorship, as I did in the last blog, and that you truly need bankruptcy relief because of the totally unmanageable size of the debts.

Lots of considerations come into play, but let’s focus on two main ones—assets and debts—in looking at three options: 1) a no-asset Chapter 7 case, 2) an asset Chapter 7 one, and 3) a Chapter 13 case.

No-Asset Chapter 7 for a Fast Fresh Start

After putting so much effort and hope into your business, once you accept the reality that you have to give up on it, you understandably may just want to clean up after it as fast as possible. And in fact a “straight bankruptcy” may be the most consistent with both your gut feelings and with your legal realities.

IF everything that you own—both from the business and personally—fits within the allowed asset exemptions, then your case will likely be relatively simple and quick. A no-asset Chapter 7 case is usually completed from start to finish in about three months. And if none of your assets are within the reach of the trustee, there is nothing to liquidate and distribute among your creditors. The liquidation and distribution process can take many additional months—or even years, so avoiding that streamlines a Chapter 7 case greatly.

But this assumes that all your debts can be handled appropriately in a Chapter 7 case—the debts that you want to discharge (write off) would be discharged and those that would not are ones that you either want to or are able and willing to pay. The debts you want to pay may include secured debts like vehicle loans and mortgages; debts you are able and willing to pay may include certain taxes, support payments, and perhaps student loans.

Asset Chapter 7 Case As a Convenient Liquidation Procedure

If you do have some assets that are not exempt, that alone may not be a reason to avoid Chapter 7. Assuming that those are assets that you can do without—and maybe even are happy to be rid of, such as if they came from your former business—letting the bankruptcy trustee mess with them instead of you doing so may be a sensible and fair way of putting the past behind you.

That may especially be true if you have some debts that you would not mind the trustee paying out of the proceeds of selling your non-exempt assets. You can’t predict with certainly how a trustee will act and how much if any would trickle down to which creditors, but this is something to keep in mind with this option.

Chapter 13 to Deal with the Leftover Consequences

Even if you’d prefer putting your closed business behind you quickly, there may be fallout from that business that a Chapter 7 would not deal with adequately. For example, if the business left you with substantial tax debts that cannot be discharged, non-exempt assets that you need to protect, or a significant mortgage arrearage, Chapter 13 could sometimes save you thousands of dollars and provide you protection from and a better way of dealing with these kinds of creditors. Deciding between Chapter 7 and 13 when different factors point in different directions is where you truly benefit from having an highly experienced bankruptcy attorney help you make that delicate judgment call.

 

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Why Chapter 13 is So Nifty

Chapter 7 is short and sweet and to the point. It often gets what you need—a discharge (a legal write-off) of all or almost all of your debts. But in SO many situations, Chapter 13 gives you so much more.

 In my last blog I showed a simple Chapter 13 case works. In my example, two debts that cannot be discharged in a Chapter 7 case—a recent IRS income tax debt and some back child support—were conveniently paid over time by the debtor through a Chapter 13 case, while that debtor was protected from those two particularly aggressive creditors. Chapter 13 buys time and protection that Chapter 7 simply isn’t designed to provide.

Here are just a few of the other extras that come with Chapter 13.

1. You can keep your possessions that are not “exempt,” instead of allowing a Chapter 7 trustee to take them from you. Retain much more control over the process compared to trying to negotiate payment terms with a Chapter 7 trustee. With Chapter 13 you have 3 to 5 years to pay for the right to keep any such possessions, instead of only the few months that the Chapter 7 trustees generally allow.

2. If you are behind on your first mortgage, you have 3 to 5 years to catch up on this arrearage, instead of the few months that a mortgage holder generally allows.

3. You can get a second or third mortgage off your home’s title, and avoid paying all or most of such mortgages, if the value of your home has slid to less than the amount of the first mortgage. You can’t do this in a Chapter 7 case.

4. If you bought and financed your vehicle more than two and a half years ago, then your vehicle payments, interest rate, and even the total amount to be paid on the loan can often be reduced through Chapter 13. This can enable you to keep a vehicle you could otherwise no longer afford. In Chapter 7 by contrast, you are usually stuck with the contractual payment terms.

5. In the same situation—a 2 and a half-year or older vehicle loan—if you are behind on the vehicle loan payments, in a Chapter 13 you don’t have to catch up those back payments. But in a Chapter 7 you almost always must do so.

6. If you owe an ex-spouse non-support obligations, you can discharge those in a Chapter 13 but not in a Chapter 7. These usually include obligations in a divorce decree to pay off a joint marital debt or to pay the ex-spouse for property-equalizing debt.

7. If you have student loans, with Chapter 13 you may be able to delay paying them for three years or more, which can be especially valuable if you have some other debts that are critically important to pay (such as back child/spousal support or taxes). And if you have a worsening medical condition, this delay may buy time until you qualify for a “hardship discharge” of your student loans.

Straight Chapter 7 bankruptcy if often exactly what you need to get a fresh financial start. But one reason you need to talk with an experienced bankruptcy attorney is that sometimes Chapter 13 can give you a huge unexpected advantage, or a series of lesser ones, which can swing your decision in that direction. (There are others beyond the main one listed here.) My job is to give you honest, unbiased, and understandable advice about these two options—or any other applicable ones—so that you can make the very best choice. Give me a call.

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