Business Bankruptcy Options

August 17, 2009 by Oliveros & O'Brien, P.C.

Bankruptcy law gives the financially struggling business a number of tools to help the business survive. Bankruptcy can also help a business close in an orderly way.  Here are the main tools bankruptcy provides for helping you and your business.

Bankruptcy Filing Options

There are three bankruptcy filing options-Chapter 7, Chapter 11 and Chapter 13. They are each very different in what they can accomplish for you. Very broadly, this is what each of these is designed to do:

  • Chapter 7: if you do NOT want to keep operating your business, this helps shut down that business-if it is still operating--and distributes whatever assets are still remaining to the creditors.
  • Chapter 11: if you DO want to keep operating your business, this helps you reorganize that business and reduce its debt so that your business can move forward in a more streamlined fashion. Chapter 11 is designed for large publicly traded businesses, but can also be filed by smaller corporations or even high-debt individuals; they are often quite expensive.
  • Chapter 13: if you want to keep operating your business, and it is not a corporation, this helps you reorganize that business and your personal finances, usually greatly reducing your debts and your monthly obligations.

 

The Legal Form of Your Business, and Your Intentions for the Business

The initial issues in deciding which Chapter to file are:

  • whether your business is in the form of a corporation (a "C-Corp" or "S-Corp"), limited liability corporation or partnership ("LLC" or "LLP"), general or limited partnership, or sole proprietorship (under your own name); and
  • whether you want to keep the business operating and need some relief from your creditors, or instead are closing it down and need to deal with the financial consequences.

 

If Your Business is a Corporation

If your business is set up as a corporation, then the law treats it as a separate legal entity, with its own assets and debts. For bankruptcy purposes, it will need to be dealt with separately from you as an individual. So if you want to keep operating a corporate business, the corporation itself may well need to file a Chapter 11 case (a corporation cannot file a Chapter 13) to get protection from the corporation's creditors.  That Chapter 11 case will often not protect the shareholders or operators of the corporation from being separately pursued individually by the corporation's creditors, because of co-signing agreements or on some other legal basis. Filing a Chapter 11 case also often reduces the practical control you may have over the corporation. Nevertheless, in the right circumstances, Chapter 11 can be a highly effective way to reduce debts and enable a business to survive.  If a corporate Chapter 11 is simply too expensive then it may be possible to collapse the company (which distributes all assets and debts to the owners) and then file a personal bankruptcy.

If instead this corporate business is no longer going to be operating, it may or may not need to file its own bankruptcy case. If the business has no assets, or all of its assets are legally tied up as collateral for its secured debts, the corporation usually does not need its own bankruptcy. The secured creditors simply take their collateral, and the other creditors write off the debts owed to them by the corporation.

But often that does not end the story. Sometimes all the debts of a corporation die with that corporation, but most of the time the shareholders or operators of the business are personally liable for some of the major debts of the business. That happens because the shareholders or operators co-signed those debts, or the law turns certain corporate debts into personal ones, such as certain taxes.  And sometimes aggressive general creditors try to pursue the shareholders if the corporation's formalities were not legally maintained and finances were not kept separate from that of the shareholders.

As a result, those shareholders or operators of the corporate business often are forced to deal with those personal debts through their own individual bankruptcy filings.

 

If You Are Operating Your Business in Your Own Name

If your business is instead a sole proprietorship-generally meaning that you have not put it into any of the other business forms mentioned above-your situation is usually more straightforward. The assets and debts of the business are usually treated as your own debts and assets, so your individual bankruptcy case can deal with your personal and business matters at the same time.

So if you are trying to keep your business operating by reducing its debts and protecting its assets, you may well be able to file a Chapter 13 case to accomplish that.  The same case would include your personal debts and assets.  If your debts are too high to qualify for Chapter 13 or if you need to gain some special advantage, you could also file an individual Chapter 11 case covering both your business and personal financial affairs.

If on the other hand you have closed or need to close a sole proprietor business, Chapter 7 also handles both your business and personal debts and assets in one package.  This may also allow you to protect at least some of your former business' assets with a personal tools-of-trade exemption. And in some circumstances you can use those former business assets to start another business after the bankruptcy is over. But be careful: operating a business during a Chapter 7 case is dangerous because all your assets, including any ongoing business, legally belong to your creditors, as they are represented by the Chapter 7 trustee. So the trustee is legally the owner and operator of your business as of when you file a Chapter 7 case.  The trustee can, among other things, claim all the business income and shut down the business. You need to work especially closely with your bankruptcy attorney to accomplish these kinds of delicate transitions successfully.

 

Other Forms of Business

Legal forms of business other than corporations and sole proprietorships generally are handled in bankruptcy like one or the other, or a mix, of these two. When you contact us, make sure you know the legal form of your business so that we can help formulate a game plan that is best for you.

 

Conclusion

Running a business is a complicated matter. And bankruptcy is complicated federal law. So not surprisingly, using bankruptcy law to help you be able to turn your financially troubled business into a successful one is a task that requires a high degree of legal competence and experience. Many bankruptcy attorneys work only or mostly with consumer clients. In contrast we have been consistently helping businesses use all the various bankruptcy tools for many years. Call us at 503-786-3800 to see how we can help you and your business get past this tough economy. Please ask to talk with Michael O'Brien, our most experienced business bankruptcy attorney.