JCKLAW has represented thousands of client over its nearly two decades of serving the New York/New Jersey metropolitan area. Many have been small businesses – we direct our Debt Resolution Practice Area to the many individual and small to medium size businesses that constitute this big, beautiful city. Businesses can fail (and succeed) for a variety of reasons, and many of these failing businesses find themselves faced with deciding if they should file for bankruptcy protection. Bankruptcy is a process you go through in federal court and is designed to help your business eliminate or repay its debt under the guidance and protection of the bankruptcy court. Business bankruptcies are usually described as either liquidations or reorganizations depending on the type of bankruptcy you take. Whether to take that step is, simply, a business decision. Other options such as bank workouts, direct restructuring, and straightforward negotiations should also be fully explored. Every situation is singular and the available options differ accordingly.
There are three types of bankruptcy that a business may file for depending on its structure. Sole proprietorships are legal extensions of the owner. The owner is responsible for all assets and liabilities of the firm. A sole proprietorship can take bankruptcy by filing for Chapter 7, Chapter 11, or Chapter 13. Corporations and partnerships are legal entities separate from their owners. As such, they can file for bankruptcy protection under Chapter 7 or Chapter 11.
Chapter 7 – Business Bankruptcy
Chapter 7 bankruptcy may be the best choice when the business has no viable future. It is usually referred to as a liquidation. It is typically used when the debts of the business are so overwhelming that restructuring them is not feasible. Chapter 7 is also appropriate when the business does not have any substantial assets. If a business is just an extension of a particular owner’s skills, it usually does not pay to reorganize it, and Chapter 7 is appropriate. Chapter 7 bankruptcy usually means that the business is dissolved. In Chapter 7 bankruptcy, a trustee is appointed by the bankruptcy court to take possession of the assets of the business and distribute them among the creditors. After the assets are distributed, and the trustee is paid, a sole proprietor receives a “discharge” at the end of the case. A discharge means that the owner of the business is released from any obligation for the debts. It is important to recognize that partnerships and corporations do not receive a discharge.
In many such cases, a business filing may be unnecessary, only a personal filing for those owners who may have personal liability on the debts incurred during the life of the business. Again, every situation – every client – is different.
Chapter 11 – Business Reorganization
Chapter 11 is a better choice for businesses that may have a realistic chance to turn things around. Chapter 11 is a plan where a company reorganizes and continues in business under a court-appointed trustee or the former owner as Debtor-in-Possession. As a Debtor-in-Possession, you run own business the way you did before but under the supervision of the court and the court-appointed trustee, and attempt to guide it successfully to a reorganized form. The company files a detailed plan of reorganization outlining how it will deal with its creditors. From there, in some cases, creditors will vote on the plan. If the court finds the plan is fair and equitable, they will eventually approve the plan. Reorganization plans provide for payments to creditors over some period of time which may exceed twenty years.
Chapter 11 bankruptcies are exceedingly complex and not all succeed. In a well-constructed Chapter 11 filing, much of the work is done before the actual filing. And vitally important is that filing a Chapter give a business a pause – some much needed breathing room – in order to recover a salvageable business.
Chapter 13 – Personal Bankruptcy
Chapter 13 bankruptcy is a reorganization bankruptcy typically reserved for consumers, though it can be used for sole proprietorships. You file a repayment plan with the bankruptcy court detailing how you are going to repay your debts. The amount you have to repay depends on how much you earn, how much you owe, and how much property you own. If your personal assets are involved with your business assets, as they are if you own a sole proprietorship, you can avoid problems such as losing your house if you file Chapter 13 versus Chapter 7. You have an opportunity to keep all that you have earned and own and still receive a discharge of some debts.
If you are interested in finding out more about the various chapters (or types) of protection that bankruptcy law can provide for you as a small business or individual, contact our office at 718-539-1100 or email us at firstname.lastname@example.org.