When Your Business Has to Throw in the Towel— Shutting Down the Business Without Losing Your Shirt

December 7, 2009 by Oliveros & O'Brien, P.C.

Although Chapter 11 and 13 are often effective tools for saving your business, there are some businesses which even these cannot help. If you have a business which may need to be shut down, you are likely wondering how to do so while minimizing the harm to you. Under the right circumstances, and with smart legal planning, filing bankruptcy for the business alone or for you personally can achieve that goal.

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Here is a very incomplete list of some of the familiar businesses that closed or filed bankruptcy, or both, in 2008 and 2009:

Aloha Airlines, Bennigan's, CIT Group, Chicago Tribune, Circuit City, Countrywide Financial, Crabtree & Evelyn, Eddie Bauer, Frontier Airlines, Hart Schaffner & Marx, IndyMac Bank, Joe's (G.I. Joe’s), Lenox, Levitz Furniture, Linens 'n Things, Mervyns, KB Toys, Monaco Coach Corporation, Reader's Digest, Sharper Image, Silicon Graphics, Tropicana Resort & Casino, Trump Resorts, Washington Mutual, Waterford Wedgwood, Wickes Furniture, Woolworths

So if you have a business you think needs to close, you are clearly not alone.

Two of our previous blogs described some options for saving your business through either Chapter 11 or 13. (Click on either of those numbers to see these blogs.)  But if you are ready to call it quits for your business, this blog tells you how bankruptcy can make that otherwise difficult and confusing transition much smoother.

And if you don’t know whether or not you should continue to try to keep your business open, call or email our business bankruptcy attorney, Mike O’Brien, who has been helping business owners make these tough decisions for many years. Click on the “Contact Us” at the top of this page or use the information at the end of this blog.

 

Chapter 7 for Your Corporate Business

IF your small business operates under a corporate name, that corporation CAN file a bankruptcy itself, without you filing bankruptcy personally. But this is rare, for two reasons:

  1. Many small businesses are not operated as a corporation, but rather as a sole proprietorship, in other words, in the name of the owners. A sole proprietorship cannot file bankruptcy alone. You have to file a personal bankruptcy with the business as a part of it.
  2. Virtually every small business’s finances are closely intertwined with the individual owners’ finances. This happens especially through business debts that are personally owed or co-signed by the owners. So even if a business CAN file its own bankruptcy because it is a corporation, that seldom prevents the owners from needing to file personal bankruptcies as well.

IF a Chapter 7 CAN be filed by the business because it is a corporation, a key question will be whether there is any benefit for it to do so. Often, by the time a business is shut down, it has little or no assets, or at least none that is not tied up as collateral on a corporate obligation. Items bought by the business with “purchase money” loans such as vehicles and business equipment generally must be surrendered to these lenders. Same result often applies to leased equipment. Most general business loans, including those owed to the Small Business Administration, come with liens tying up just about everything else in the business, including any remaining inventory and supplies, receivables and cash. Finally, if your business owes back rent for the business premises, the landlord often has a right to anything else. If after all this the business has little or nothing left, then there is generally no point to filing a corporate Chapter 7 case.

Instead, the corporation ceases operating, its creditors are informed, and they generally have no further recourse for getting paid by the business. Those corporate creditors may have the right to pursue you personally, if you co-signed any of the corporate debts, if the law makes you personally liable as with many types of taxes, or sometimes if you did not keep your corporation's finances strictly separate from your own.

 

Personal Bankruptcy—Chapter 7 or 13—to Deal with the Consequences

Whether you need to file a personal bankruptcy, and whether a Chapter 7 or 13 would be better, depends mostly on how much of the business’s debts you are personally liable for and the nature of those debts. For example, if the business debts you are liable for are all general unsecured obligations—such as the terminated business premises lease or unpaid vendors—your best route may be an individual Chapter 7. That usually discharges all unsecured business as well as personal debts, giving you a relatively quick fresh financial start. But if you owe taxes or are behind on a secured debt such as your home mortgage or vehicle loan, then a Chapter 13 case may well be better. It often provides you a better way to pay or catch up on taxes or home or vehicle obligations, while protecting you from the debts of the closed business.

There are many other considerations, including the amount and nature of your personal assets and your personal debts, as well as that of your anticipated income. There are certainly situations where a bankruptcy may not be necessary, or may not be the best solution.

You need someone deeply experienced in business bankruptcies who will take the time to understand your business and advise you about all your alternatives. Unlike many bankruptcy attorneys who do exclusively consumer bankruptcies, Michael O’Brien has a great deal of experience with many facets of business bankruptcies, including Chapters 7, 11, and 13. Call Mike personally to talk about your business. You can reach him at 503-786-3800.