Tag Archives: small 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 Struggles

Despite all the dollar signs flying around in the press, small businesses in this Country are in trouble — pretty much all of them.  Yea, I know about the SBA programs, PPP and EIDL and forgiveable advances — yea, I know.  Small businesses are still in real trouble.  Closures, oil prices, reduced sales, reduced interest, changes in customer habits, ill employees, increased insurance costs.  Small business are just in trouble, and there is no magic wand that is going to fix it all on May 1 or June 1 or even next fall.

I am looking at three strategies.  First, managing cash flow.  Deferring payments isn’t a cure, but it buys time to refocus.  Reducing expenses, cutting deals with lenders.  It all  helps, even if all it does is buy time.  Second, now is the time to confront the fundamentals.  Can this business be profitable in the new world in which we find ourselves?  Can it lure its customers back?  Does its community have the cash flow to buy what it is selling — particularly a problem in the oil patch, right now.  Third, if the business can restructure its debt, reduce interest rates, change payment terms, eliminate a lot of the unsecured debt; does that make a critical difference?

If the answer to that last question is yes, you need to know about the brand new Subchapter V in the Bankruptcy Code’s Chapter 11.  There are some amazing new tools to restructure small businesses that just became available in February, 2020.  It is going to make the difference for a lot of businesses between having a future and not.  The statute was passed last Fall, it went into effect in February, 2020.  Nobody knows what all it can do or not do just yet, but it is a game changer for small businesses caught with too much debt in a sudden downturn.

More on that in the next few days.

Elaine