Small Business Bankruptcy – The Next Steps

Bankruptcy might be your best shot at eliminating debts and restructuring your finances. 2020 brought with it an economic disaster on a scale not seen since the Great Depression. Forbes predicts bankruptcies this year will increase by over 140%, and these bankruptcies will affect small businesses the most.

Bankruptcy Options For Small Businesses

Depending on what kind of business you own, its income, and your relationship to it, there are potentially three types of bankruptcy available to you. We will break down chapter 7, chapter 11, and chapter 13 in detail so you can decide what bankruptcy option is right for you.

Chapter 7

This option is best if you are a general partner or sole proprietor of a business. Chapter 7 can eliminate all debts for which you are personally responsible. You can file for certain exemptions that may make it possible for your small business to continue operating.

What Exemptions Can Keep Your Business in Operation?

Your chapter 7 trustee cannot sell off exempted assets, but what counts as a potential exemption varies state by state. So, depending on where and how you operate your business, it may continue despite the bankruptcy.

Some state exemptions allow debtors to exempt “tools of the trade,” which can cover items essential to certain types of businesses up to a certain price. Another exemption that may be available to you is a “wildcard” exemption. These protect any asset of the debtor’s choice.

Chapter 7 For LLCs and Corporations?

If you are an LLC or corporation, chapter 7 can only really help you liquidate your business. Unlike chapter 11, there is no way to keep your business operating under chapter 7. All of your business’ assets will be liquidated.

Chapter 11

Chapter 11 bankruptcy is the stereotypical type of bankruptcy you hear about in the news. When giant corporations claim bankruptcy, this is usually the kind they file. However, the majority of chapter 11 bankruptcies are filed by small and medium-sized businesses.

Under chapter 11, business entities like LLCs and corporations can restructure their debt by selling some assets. This option allows businesses to remain in operation, usually at a reduced scale.

Special Provisions for Small Businesses

Chapter 11 bankruptcy is a time-consuming and expensive process. Usually, larger businesses can handle the costs, but smaller companies may have trouble with the legal fees and restructuring costs.

The CARES Act and Small Business Bankruptcy

Since the CARES Act increased the debt ceiling for small business bankruptcies in 2021, the bankruptcy code considers a small business as an individual or entity that owes no more than $7,500,000 of business-related debts. This amount will hold until the provision is set to expire in March 2022. Previously, the debt ceiling was only $2,725,625.

The Creditor’s Committee Can Be Waived

The creditor’s committee is formed to protect the interests of the creditors, and it is formed and retained at the debtor’s expense. This includes fees for attorneys, experts, and other legal professionals. Creditor’s committees are usually very expensive to maintain. A designated small business debtor can petition to waive the creditor’s committee from the bankruptcy process.

More Oversight, Deadlines, and Reporting for Small Business Debtors

Small business debtors are subject to stricter guidelines, increased oversight, and more rigorous enforcement of deadlines for meeting all of the steps in the bankruptcy process.

Chapter 13

This bankruptcy option is only meant for individuals, but by default, becomes available to individuals who are also sole proprietors. LLCs or corporations are not eligible for chapter 13. This option is typically harder to file for because it allows the debtor to keep most of their assets and creates a payment plan for the debtor to pay off some of their debt.

This means that as the sole proprietor of a business, you have three to five years to pay back some or all of the debts in monthly installments. You can select workspace and equipment as some of your exemptions and, technically, through chapter 13, you can keep your business in operation.

What Option Is Right For Your Business?

Declaring bankruptcy is a massive step toward debt relief. By knowing your options, you can make an educated decision and select the chapter that is best for you and your business interests.

About the Author

Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes extensively for the Law Offices of David Offen, a bankruptcy attorney in Philadelphia.