Tag Archives: business

Why Your Business Probably Won’t File for Bankruptcy

Chapter 7 is the most commonly filed chapter of bankruptcy — but it is very rarely filed by a Corporation, Partnership or LLC.  We can all name lots of businesses that have filed Chapter 11 bankruptcy.  Traditionally, that has been a large, expensive, complex reorganization.  Exxon, most of the Airlines, General Motors, Sears, J.Crew.  It is a long list.  I will bet, however, that you can’t name a single Corporation that has filed a Chapter 7 Bankruptcy.

The reason for that is actually quite simple.  Lots of business owners would love to file a Chapter 7 for their wholly owned LLC and walk away from the business debt — except they can’t.  You see only an individual (that means a human being) can get a discharge in a Chapter 7 bankruptcy.  That means that if a corporation or an LLC files a Chapter 7 bankruptcy, it gets to turn over all of its assets to the Trustee to administer for the benefit of its creditors, but it doesn’t get out of its debt.  Now, it comes out of the bankruptcy with no assets with which to pay any of its bills — but it still legally owes the money.  So, you spend a lot of money, you turnover the business assets to the Trustee, you expose the owners and managers of the business to potential liability — and get absolutely nothing in return.  Not generally a great plan.

Instead, what generally happens, is that the business owners liquidate the assets themselves.  They have to stay within certain legal parameters, but they do have some control over how the assets are liquidated and how the proceeds are distributed.  Also, they can pay themselves a reasonable amount of money for doing it.  Then, they shut down the Corporation or the LLC.  Of course, since most small business debt is guaranteed by the owners (one way or another) the owners may then need to file their own Chapter 7 bankruptcy, but they are eligible for a discharge.  Also, this doesn’t mean that the owners inherit the unpaid business debts. If the owners weren’t originally liable for the debt, they don’t become liable for it.  It is just rare for small businesses to incur any significant debt without a personal guaranty from someone.

Of course, since February of 2020 there is now a viable small business reorganization subchapter.  So, it is now much more viable to reorganize a small business in a bankruptcy, if remaining in business is a viable option.  If it isn’t, however, it is rare to shut down a small business in a Chapter 7 Bankruptcy.  There are better ways to deal with the business entity outside of bankruptcy then inside.

Elaine 

Small Business and Bankruptcy

Clients call me about filing for bankruptcy, and they own a small business.  It may be a retail store, a restaurant, a trucking company, a temporary employment agency — you name it.  The businesses vary, the nature of the problems vary, the business may be a success and other things are the problem, there is only one constant.  I have never had a small business owner walk in and know all of the things I needed to know to help him sort out his options with respect to his debts.  Never.  Not once.

So, here is a list:

  1. Is the business a separate entity, i.e. corporation, LLC, partnership, sole proprietorship (d/b/a) or something else?
  2. Assuming that the business is a separate entity, what does it own?
  3. What creditors have liens against business assets and which assets do they have liens on?
  4. What debts does the business have and which of those are you also liable for?
  5. Is the business viable or does it need to be shut down?
  6. If it needs to be shut down, what is the best way to realize value from the remaining business assets and is any particular creditor entitled to that value?
  7. Which creditors need to be paid first and why?
  8. How have you been paid for running the business?
  9. How have you contributed money to the business to keep it afloat (contributions to capital, loans)?
  10. How is the business taxed (does it file its own return, is its income reported on your return)?
  11. What business records exist and where are they?

This is certainly not an exhaustive list, and there may be a question or two that don’t apply to every scenario (especially to a scenario where the business is a viable concern).  However, these are all things that every business owner really should know.

I intend to flesh out this list over the next few weeks.  So, check back.  I will create a new category for Business Bankruptcy to make additional posts easy to find.

Elaine