Owning a small business is a great way to do what you love and get paid for it. It can be a stressful process and a great adventure at the same time.
What happens when life takes unexpected turns and your business finances do not go as planned? When can you file bankruptcy for your SMB?
Luckily, there are options available to suit your individual needs, without disrupting your dreams!
Bankruptcy is when a borrower is facing a financial hardship that hinders their ability to pay back their lenders.
Bankruptcy is not always a solution to the mismanagement of money. Actually, many pursue bankruptcy because they need a clean slate. The borrower can do this on their own or with legal representation.
They will attend credit counseling, file paperwork, and attend budget counseling. Also, some chapters of bankruptcy require appointing a trustee to the borrower.
Upon completion of all required steps, the court will dissolve or consolidate debts within 60-75 days. Depending on which chapter of bankruptcy one files, the course of action for the debts will vary.
If it is a Chapter 7 bankruptcy, the trustee must be involved in any decisions regarding asset liquidation.
An SMB may be struggling financially, but not quite going under. It is important for business owners to know when to file for bankruptcy—and if that is even their best option.
Business bankruptcy is a little different than a personal filing. Most business bankruptcy filings protect the business’ assets—without requiring a complete shutdown of operations.
Chapter 7 bankruptcy eliminates the borrower’s debt and potentially collects assets. This is the best direction for a business that is unable to salvage its finances through other options and needs to cease operations.
This route is only available if the business operates as an LLC or corporation. Chapter 7 bankruptcy assists those experiencing hardships due to the local economy, a life change, or an obsolete product.
Within Chapter 7, a trustee will assist in liquidating the business’ assets. If the business functioned as an LLC or a corporation, the business owners are not permitted to claim any asset exemptions.
Assets will not likely be liquidated if their value is less than the lien on them.
Chapter 11 is a reorganization, consolidating the business’ debt without collecting assets. This is to allow the business to continue operating while paying their debt in a way that is manageable to their income.
Chapter 11 is geared toward larger corporations. This is because the debtor must devote more time and money to having the filing approved.
This may not be the best option for smaller businesses, given the amount of finances needed to file alone.
Chapter 13 functions like chapter 11, but is not available to an LLC or a corporation. This chapter is solely for married couples or individuals whose business is a proprietorship. The function is to reorganize business and personal debts.
No third parties are protected under bankruptcy filing if all assets are legally obligated to the business. In those instances, individuals should consider filing personally.
Always consider the factors involved in bankruptcy before making the decision to file, such as costs involved.
As of February 2020, the US government established the Small Business Restructuring Act (SBRA). This legislation aimed to streamline the process of small business bankruptcies, making it both shorter and cheaper.
For example, this Act now appoints a trustee to assist with the reorganization plan and process. It also eliminates the need for current equity holders to ensure that the new plan is fair.
Finally, it applies the business owner’s projected disposable income toward future payments.
If you are feeling overwhelmed with your SMB’s finances, bankruptcy attorneys are here for you.
Contact an attorney today to discuss your options and determine when to file bankruptcy—and which option is right for you.
Dealing with bankruptcy as an SMB doesn’t have to be a single-person job. The bankruptcy lawyers at Parker & DuFresne will help you determine the best course of action to help you get out from under your debt and move forward to a debt-free future. Call today at 904-733-7766 for a free consultation, or click the button at the top of the page to schedule online.
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