Finding debt relief options for small businesses

Finding debt relief options for small businesses

On Behalf of | Aug 12, 2022 | Bankruptcy |

Interest hikes, high inflation and supply chain issues have affected many small businesses. U.S. bankruptcy filing data revealed a 34% rise in commercial Chapter 11 filings last May, although the overall filings decreased in the last year. Recent legislation that restored the higher debt limit of $7.5 million originally set by the CARES Act has allowed businesses in New York and elsewhere to continue to file under subchapter V.

The business owner finds the present economy challenging and finding solutions can mean restructuring or even liquidating assets. As a business owners in Buffalo and throughout Erie County, having trusted legal counsel will help you discover your options while you regain financial stability.

Bankruptcy filings for small businesses

 When businesses seek debt relief options through bankruptcy, Chapter 7 or 11 under the U.S. Bankruptcy Code are the main options. The main difference between them is that the first will liquidate, while the second will restructure.

In a Chapter 7 filing, the aim is to liquidate the debtor’s non-exempt assets, pay off creditors and discharge all other pre-petition debt. Although this usually dissolves the company and impacts its credit, it is possible to salvage the entity by buying back unsold assets. As the filer must be under the median income threshold; however, this option is most suitable to small businesses and sole proprietorships.

With Chapter 11, entities with a large debt may reorganize the company to restructure it, which may include a partial liquidation. The key is to show the bankruptcy court that the company can regain its profitability once the reorganization consolidates debt and restructures.

Contrasting Chapter 7 and 11

 Before deciding which bankruptcy is best for the business, it is important to prepare for the steps that lie ahead with either plan, which include:

  • Filing a petition, which will trigger an automatic stay in either case.
  • Appointing a trustee, which will occur automatically in a Chapter 7 liquidation, and also in subchapter V small business filings of Chapter 11.
  • Business operations, which may proceed in a Chapter 11, but not in a Chapter 7.
  • Recovery for creditors, which will allow large discounts to Chapter 7 purchasers but less recovery than in Chapter 11 cases.
  • Cost-effectiveness, which will depend on litigation and professional fees.

It is important to note that subchapter V filers are receiving more cost-effective and speedier plan confirmations under the revised provisions.