The coronavirus pandemic has decimated businesses nationwide. Unsurprisingly, small businesses are among the hardest hit.
Many small business owners have chosen to close their doors rather than continue to struggle. Among those determined to stay in business, bankruptcy rates have gone up by around 40 percent.
Filing for bankruptcy can be a high-impact way to manage small business debts. It can keep a company moving forward despite the upheaval. It can also be a complex and stressful process in which small mistakes carry big costs.
Keep reading to learn why every entrepreneur should consult with a small business bankruptcy attorney before filing.
Using Bankruptcy to Manage Debt
One of the first things business owners need to consider before filing for bankruptcy is what type of debt their businesses carry. This is critical because:
- Bankruptcy does not discharge all types of debt
- Different types of bankruptcy discharge debt differently
- Any debt not cited when one files for bankruptcy cannot be discharged
Among the kinds of business debt that may not be dischargeable under bankruptcy are:
- Certain tax debts
- Debts not listed at the time of filing
- Debts incurred due to intentional and malicious action against people or property
- Government- or court-ordered fines, fees, and penalties
- Some forms of government-funded or secured loans
A small business bankruptcy attorney can help business owners:
- Evaluate their debts to determine how effective bankruptcy will be at discharging them
- Offer advice on making a case for a “hardship discharge” which can help entrepreneurs eliminate debts that would otherwise not be discharged
- Determine the best type of bankruptcy for their needs
Types of Bankruptcy for Business
There are three main types of bankruptcy appropriate for businesses:
- Chapter 11
- Chapter 13
- Chapter 7
Understanding the pros, cons, and differences between each type can help you make the best decisions for your business. Choosing the correct type of bankruptcy is particularly important because there are strict time limits on how long businesses that file for bankruptcy must wait before they become eligible to file again. Filing under a chapter that your business does not qualify for or cannot fully benefit from can lock you out of the benefits of the correct chapter for a period of years.
Chapter 11 Bankruptcy
Almost every type of business can file under Chapter 11, including:
- Sole proprietors
- Partnerships or joint ventures
- Limited liability companies
Filers do not need to meet any specific income or debt minimums to file. Like Chapter 13 bankruptcies, Chapter 11 cases call for businesses to enter structured payment plans for their debt rather than pursue liquidation. This can result in some very positive outcomes.
Businesses that file Chapter 11 can remain open and in operation. Business owners retain control over their businesses and finances.
Since there is no set time limit on repayment plans, they may have the flexibility to extend repayment over a lengthy period of time. This can make it possible to stay in business even during long periods of upheaval or reduced income, such as many businesses face now with the pandemic.
Some debt is dischargeable under Chapter 11, which can reduce filers’ overall debt load. Discharged debts disappear at the start of the process, allowing filers to reap the credit and cost-saving benefits of discharge right away.
While special provisions under Subdivision V can give small businesses a break, Chapter 11 cases have the potential to be messy and costly. Businesses also remain responsible for paying off most of their debt, which can require careful money management long-term.
Chapter 13 Bankruptcy
Only sole proprietors may file bankruptcy Chapter 13 but, for eligible individuals, it can be an appealing choice. It offers an array of benefits not available under Chapter 11.
Filing under Chapter 13 tends to be faster and much less expensive than filing under Chapter 11. It also offers a certain level of flexibility. If filers can pay off their creditors in full earlier than expected, the court will let them and close out the case.
Perhaps most importantly, Chapter 13 allows filers to consolidate their personal and business finances into a single bankruptcy case. This enables them to discharge as many types of debt as possible all at once, giving them the cleanest possible financial slate while still keeping the business intact.
In addition to limited eligibility, Chapter 13 has a few other notable cons including:
- Strict total debt limits that restrict filing eligibility
- Firm maximum repayment plan limits of five years
- Requirements that filers dedicate all of their disposable income to repaying debts
- The non-negotiable involvement of court-appointed trustees
Chapter 7 Bankruptcy
Filing Chapter 7 bankruptcy is a less common but valid choice for small business owners. Most entrepreneurs who wish to keep their businesses cannot file under Chapter 7 as it requires complete liquidation of assets. However, it can be ideal for business owners who want to close out an existing business.
By eliminating any debt associated with their existing business, entrepreneurs can give themselves a clean slate from which to start over with a new enterprise. In rare cases, single-person service-oriented businesses may be able to file Chapter 7 and remain in operation.
The Importance of a Small Business Bankruptcy Attorney
In every case, business owners should find and work with the best small business bankruptcy attorney available. Working with an attorney:
- Provides clarity and peace of mind
- Ensures that businesses choose the right type of bankruptcy for their needs and intentions
- Maximizes their chances of discharging as much debt as possible
- Keeps costs down by ensuring that filing is done correctly on the first try
- Reduces business owner stress throughout the process
A bankruptcy lawyer can prevent costly mistakes and help business owners keep their businesses while shedding their debt.
When searching for “a bankruptcy attorney near me,” entrepreneurs should prioritize knowledge and experience. In particular, they should focus on choosing an attorney with experience in Florida. State laws regarding bankruptcy can vary, so it is essential to select an attorney familiar with the area in which a business operates for the best results.
Schedule a Consultation
If you are considering bankruptcy to help your business get out from under debt, don’t wait. Schedule a free consultation and learn what an elite small business bankruptcy attorney can do for you today.