Bankruptcy isn’t just for cleaning up after the death of a business. It can keep your business alive.
Bankruptcy saved General Motors. That business got out of a lot of it debt and restructured its operations, and ended up saving a lot of jobs. If you operate your own small business, bankruptcy may be able to save your job, too.
Let’s assume you have a very small, very simple business. One so simple that you did not form a corporation or any other kind of legal entity when you set up the business. And to keep this blog simple, assume you don’t have any partners. You own and operate your business by yourself for yourself, in what the law calls a sole proprietorship.
There are advantages and disadvantages of operating your business this way. For better or worse you and your business are legally treated pretty much as a single unit—unlike a corporation which owns its own assets and has its own debts distinct from the owner(s). In the right circumstances, a sole proprietorship is a much easier type of business to deal with in a bankruptcy.
Chapter 7, “straight bankruptcy,” is seldom the right option if you own a business that you want to keep operating during and after the bankruptcy. Chapter 7 is also called “liquidating bankruptcy.” You can write off (“discharge”) your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, although some of the assets of an ongoing business may be exempt, usually not all of them are. So the Chapter 13 trustee could require you to give crucial parts of your business to him or her to liquidate.
Instead, a Chapter 13 case—ironically sometimes misnamed a “wage-earner plan”—is much better designed to enable you keep your personal and business assets. You get immediate relief from your creditors, and for a much longer period of time, usually along with a significant reduction in the amount of debt to be repaid. So Chapter 13 helps both your immediate cash flow and the business’ long-term prospects. It is also an excellent way to address tax debts, often a major issue for struggling businesses. Overall, it is a relatively inexpensive tool that combines the discipline of a court-approved plan of payments to creditors with the flexibility of allowing you to continue operating your business.
In the next few blogs I’ll explain some of the most important benefits of filing a business Chapter 13 case. But in the meantime, please understand that when you own ANY kind of business, solving your financial problems will be more complicated. Sometimes only a little more complicated, other times much more so. Because we’re not just dealing with the size and timing of a paycheck, but rather with all the financial and practical aspects of running a business. Plus, issues of timing are often important in business bankruptcy cases, requiring more pre-bankruptcy planning to chart the best path for you. So, no matter how small your business, be sure to get competent legal advice, and do so as soon as possible. You have a lot at stake.