Small Business Bankruptcies

Before filing for a small business bankruptcy, financial experts advise the company's owners to consult with an attorney who specializes in this area. Federal laws can change and, of course, bankruptcy laws vary from one state to another. A competent attorney will be knowledgeable on changes to the Bankruptcy Code and provisions that are specific to the state where the debtors are conducting business. The attorney will also be able to advise the owners on which of the six types of bankruptcies will offer them the most appropriate protection given the specifics of their situation. While individuals usually file under Chapters 7 or 13, a small business bankruptcy may be filed under Chapters 7, 11, or 13. The decision of which chapter offers the most appropriate protection depends upon such factors as how the company is structured and the circumstances of the indebtedness, Another type, Chapter 12, is specifically designed for family farmers and family fishermen who have regular income from these ventures. Scriptures give this promise from God: "I will instruct thee and teach thee in the way which thou shalt go: I will guide thee with mine eye" (Psalm 32:8). Oftentimes that promise is fulfilled by seeking out competent resources and relevant information.

A Chapter 7 small business bankruptcy is an option for sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Most partnerships, LLCs, and corporations are considered as separate legal entities. This means that the owners' personal assets are protected from the company's creditors. However, a trustee has the authority to access the personal assets of the owners of a partnership if the company assets do not satisfy the demands of all the creditors. The sole proprietor's personal assets are not protected at all as the company is seen as an extension of the owner and not a separate entity. A business may opt for Chapter 7 when liquidating the company's assets, not reorganization, is the goal. There is no future for the business, no substantial assets, and overwhelming debt. The attorney will provide worksheets for the owners to complete and will use that information to file the small business bankruptcy petition and create the necessary schedules of financial information. The act of filing the petition with the court places an automatic stay on the collection efforts of the creditors. Once a trustee is appointed, a 341 meeting will be held with the creditors. (The name comes from Section 341 of the Code and is sometimes referred to as the first meeting of the creditors.) At this meeting, the owners are under oath to answer all questions put to them by the trustee and/or the creditors. In the Chapter 7 process, the trustee gathers and sells the business assets. He then distributes the proceeds to the creditors according to the agreed-upon plan.

In many ways, a Chapter 13 small business bankruptcy is similar to a Chapter 7 except that a Chapter 13 is not designed for LLCs or corporations or for most partnerships. Though individuals or married couples can file for personal bankruptcies under Chapters 7 or 13, as far as a business is concerned, this type is reserved for sole proprietorships. As in Chapter 7, a petition is filed by sole proprietor, the required documents are completed, a trustee is appointed, and a 341 meeting is held. The sole proprietor is under oath to answer all questions, but few creditors may actually participate in these proceedings. In this type of small business bankruptcy, the sole proprietor creates a repayment plan that pays all debt within three to five years. As part of creating the plan, the sole proprietor may renegotiate with the creditors to lessen the amount of the debt. As long as the payment plan complies with the Code, the creditors may not even vote on the payment plan. The trustee oversees the process by receiving a monthly payment from the sole proprietor which is then disbursed to the creditors according to the agreed upon plan. The sole proprietor may, if the outlook is favorable, stay in business and work to improve the company's financial status.

A Chapter 11 small business bankruptcy is the most complicated as the goal is to reorganize the company, not to liquidate the assets. An attorney is most definitely needed to navigate the complexities of this process which is most often used by financially-troubled partnerships, LLCs, and corporations. Usually a trustee is not appointed, but the company becomes what is known as a debtor in possession. The owners or managers retain the assets and continue operating the business. At the 341 meeting, a creditor's committee may be appointed which is made up of the seven largest unsecured creditors. This committee helps the owners or managers with the reorganization plan. The creditors are divided into classes and each class gets to vote on the reorganization plan. Of course, all this has to be done while adhering closely to the Code. Because of the complexities of the approving the plan, the process may take one to two years. Once everything is confirmed, the company's secured debt payments may be spread out over a twenty to thirty year period. These are creditors whose loans are secured by collateral, a tangible asset that can be repossessed if the debt isn't paid. A small business bankruptcy is never pleasant, but the process can be beneficial to companies that need to be rescued from overwhelming debt or can benefit from being given a second chance to succeed.

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