Independent small businesses faced a difficult 2020. But their bankruptcy options are limited. Chapter 11 reorganization is a time consuming and costly process which is only realistic for large corporations. Chapter 7 and Chapter 13, however, may be reasonable options for small business.
Individuals and businesses can file a Chapter 7 liquidation bankruptcy. This is generally the fastest and cheapest way to wind up a struggling business. It liquidates the business by the end of the process, leaves nothing for creditors and dissolves the business.
Business owners may consider using a Chapter 7 bankruptcy to address their personal debt. Relieving personal debt may indirectly help their business during economic difficulties by allowing owners to keep more money in their business, improve its cash flow and giving it a chance to survive until business and profits increase.
This personal debt option has drawbacks. Owners may have to liquidates some of their assets to pay as much as they can toward their personal debts under the supervision of a court-appointed trustee.
A primary residence and retirement accounts are usually protected from creditors. But nonretirement and investment accounts in the business owner’s name which are not owned by the business may be at risk.
Both spouses do not have to file for Chapter 7. The business owner spouse may file while the other spouse’s income and assets are not affected. However, this may apply only to assets in that spouse’s name and not to jointly owned property.
Spouses may be able to shift liabilities and assets to take the best advantage of this bankruptcy. But this must be done legally.
After Chapter 7
Personal debts are legally settled after the trustee distributes the proceeds of the asset sales to creditors. However, debtors should not reaffirm their debt by agreeing they owe money, agree to pay money, or make any payment after bankruptcy.
But when this occurs, personal debts are cleared. There are reduced or monthly payments where less income is taken from the business. Certain debts and assets may be reorganized to take advantage of this process, but these transactions must be legal because courts closely scrutinize them.
Chapter 13 is a non-liquidation bankruptcy. Debts are restructured and assets are not sold off.
Businesses are ineligible for Chapter 13. Independent business owners, however, can file for bankruptcy in their individual capacity. Business debts are not covered by this filing, but it may help the business indirectly.
These options should be carefully considered because bankruptcy may be complicated, closely scrutinized and impact personal finances and credit scores. An attorney can assist you with this process and provide other options.