These are perilous times for small businesses, which often operate on a shoestring budget and rely on cash flow to continue operations. The recent government shut-downs due to the coronavirus pandemic forced many small business owners to close their doors, perhaps for good. Others remain open but are relying on government loans and grants to make payroll and rent. How long can that continue?
Some businesses cannot survive, let alone thrive, while social distancing and masking are mandated, and it may be more than a year before there is a vaccine, everyone is vaccinated, and social distancing mandates can be lifted.
If your small business is struggling due to the COVID-19 pandemic and its economic consequences, read this article for an explanation of your bankruptcy options, from the office of a noted bankruptcy attorney in Philadelphia.
Renegotiate Your Debt By Filing Chapter 11
If your business is operating under these economic conditions, but you are struggling to pay your business debt, consider whether reorganizing that debt might make it more feasible to continue operating.
To file a Chapter 11 bankruptcy case, you must prepare and submit the following:
- A Chapter 11 petition;
- Schedules of assets and liabilities;
- A schedule of current income and expenditures;
- A schedule of unexpired leases and other executory contracts; and
- A statement of financial affairs.
In addition to your legal fees, you will pay a $1,167 case filing fee and a $550 administrative fee upon filing or in installments with the permission of the court.
With the initial filing or shortly thereafter, you will file your written disclosure statement and your proposed plan of reorganization. The disclosure statement sets forth your business’ assets, liabilities, and business affairs so that your creditors can decide whether your plan of reorganization is fair to them. The plan sets forth how the business will continue operating and how it will pay its debts.
The plan itself must classify creditors’ claims and specify how each class of claims will be treated under the plan. The creditors whose claims are “impaired,” meaning they will be paid less than what is owed or the payment terms are altered, then vote on the plan by ballot. The court then conducts a confirmation hearing, considering the wishes of the impaired creditors and the information in the disclosure statement. If the court determines that the proposed plan is feasible and fair to creditors, it will confirm the plan.
As the owner of the business, you are called the debtor-in-possession, and thereafter you will continue to operate but pay debts according to the reorganization plan.
Small Business Chapter 11
A “small business debtor” was considered a business with debts of $2,566,050 or less until March 2020. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed in March increased the debt limit for “small business debtors” to $7.5 million, making the small business bankruptcy process available to more businesses.
In small business cases, the filing requirements and procedures are streamlined somewhat. Deadlines are shorter, so the case proceeds more quickly. No creditors committee is appointed. A small business debtor saves time and also money, as there are no Trustee fees imposed in these cases.
To file a small business case, the debtor in possession must file, among other things:
- A Chapter 11 petition;
- The most recently prepared balance sheet;
- A statement of operations;
- A cash-flow statement;
- The most recently filed tax return.
A small business debtor is subject to more oversight by the U.S. Trustee, attending an initial interview to determine the viability of the business and the debtor’s plan, and subject to monitoring throughout the case to ensure compliance with the plan.
Sole Proprietors and Single-Member LLCs Can Reorganize Under Chapter 13 Instead
If you are a sole proprietor or organize your small business as a single-member LLC, you may be able to file a Chapter 13 bankruptcy case instead of Chapter 11. The benefits of filing Chapter 13 over Chapter 11 are twofold: you will save time and money, and you will be able to include your personal debts in the filing.
The downside to filing any form of bankruptcy if you are a sole proprietor or single-member LLC is that your personal assets are also on the line. If you cannot exempt your personal assets from the bankruptcy estate, you may have to pay creditors what they would have gotten had the Trustee liquidated your nonexempt assets. This is done through your Chapter 13 plan.
Close Permanently By Filing Chapter 7
If you have assessed your situation and feel that it is just not possible to continue to operate your business even if some debt were renegotiated, you have the option of filing a Chapter 7 case and liquidating. Business assets will be sold to partially satisfy the debt, and the business will cease to exist.
The downside of filing a business Chapter 7 is that your personal guarantees of business debt will not be discharged. The upside is that your personal assets are not part of the bankruptcy estate and are not in danger of seizure by the Chapter 7 Trustee.
Sole Proprietors and Single-Member LLCs Can Discharge Personal Debt and Guarantees in a Chapter 7 Case
While these business debtors can discharge personal as well as business debts and obligations, their personal assets are also on the line.
However your business is structured and whichever form of bankruptcy you are considering, be sure to work with an experienced business bankruptcy attorney to ensure that you will achieve your goals with your bankruptcy and that there will be no unintended consequences from filing.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.
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