Understanding Small Business Bankruptcy

Individuals, families, and businesses can all face rough financial times. Small businesses generally have access to the same chapters of the federal bankruptcy code as individuals and families, though one of them – Chapter 11 – is mostly used for businesses.

If your small business in or around Amarillo, Texas, is awash in debt and needs to find a solution either to move forward or to cease operations, contact me at Swindell Law Firm.

For more than four decades, I have been helping individuals and businesses resolve their debt obligations and move forward in life. Swindell Law Firm proudly serves clients in the entire Texas Panhandle, including Borger, Pampa, Hereford, and Dumas.

Considerations When Filing for Bankruptcy

Three bankruptcy options are available for small businesses seeking to reorganize debts or liquidate assets to resolve credit obligations: Chapters 7, 11, and 13.

The structure of your small business, however, will play a huge role in which option you choose. If you’re a sole proprietor who is individually responsible for all debts, the options are essentially wide open. However, if you’re operating as a partnership, Limited Liability Company (LLC), or corporation, business bankruptcy can still expose your personal assets to liability.

Chapter 7: The Liquidation Option

Chapter 7 of the bankruptcy code is, on the surface, probably the scariest one since it may involve the sale of assets to pay off creditors. Though that sounds terrifying, if you file as an individual for Chapter 7, many of your assets are protected and exempt. Your home of almost any value is protected under Texas law, as are cars of the family.

However, if your partnership, LLC, or corporation files under Chapter 7, there are no exemptions, and if the sale of business assets doesn’t cover debt obligations, there is no discharge of debt at the close of bankruptcy. The partners in a partnership can find themselves still liable for debts. They may need to file individual bankruptcy as well. The same goes for an LLC. In a corporate filing, whoever signed a debt obligation can be held individually liable as well.

Sole proprietors, who can fold their debts into a personal filing, can safely use Chapter 7 for debt discharge while retaining their personally exempt assets.

Chapter 13: The Repayment or “Wage Earner’s” Option

Chapter 13 is another form of reorganization and repayment of debts owed. It is often called the “wage earner’s plan” because it involves individuals with a monthly income.

A reorganization and repayment plan is proposed based on the filer’s disposable income, that is, their leftover money after the essentials of life have been met. Depending on that income, the repayment plan then stretches out over three to five years, after which any remaining debt is discharged. A bankruptcy trustee is assigned to supervise the process.

This option is clearly available only for sole proprietors who can claim their business debt as their personal debt. Other business structures are excluded. The sole proprietor would also have to have some sort of monthly income to qualify, even if from the affected business.

Chapter 11: The Debtor-in-Possession Option

Chapter 11 is similar to Chapter 13, to be discussed next, in that it allows the business (in rare cases, individuals) to create a repayment plan that can satisfy all creditors over time. It is open to sole proprietors, LLCs, partnerships, and corporations, but the same caveat exists in that your personal assets could ultimately be affected if the plan fails or is rejected by creditors.

The unique aspect of this type of filing is that the entity filing for bankruptcy remains what is called a “debtor in possession.” This means that you get to continue operating your business while you pursue the payment of your obligations. There is generally no bankruptcy trustee watching over you and approving everything.

However, you must be able to convince your creditors to go along with the plan. If they object, the court can force you to improve your plan or even to convert the case to Chapter 7 and liquidate.

How Legal Counsel Can Help

When it comes to bankruptcy and small businesses, a lot hinges on the type of business being operated and in whose name the debt is obligated. Small business bankruptcy is certainly not a do-it-yourself proposition. You’re going to need the help of an experienced and knowledgeable bankruptcy attorney.

For businesses located in the Texas Panhandle, contact me at Swindell Law Firm. I can meet with you, discuss your situation with you, advise you of your options, and then help you navigate the process of getting a fresh start in life through bankruptcy.