Helping Texas Small Businesses Since 2009
If your company is overwhelmed with debt and can't keep up with payments on obligations, bankruptcy may be an option. The consequences of bankruptcy are long-lasting and far-reaching, so before you accept the "one-size-fits-all" approach most bankruptcy firms employ, consider all alternatives and then pursue bankruptcy as a last resort only if it's the best option for your unique situation.
Not sure if Bankruptcy is the best choice for your business? Contact our team at 877-408-3328 or schedule a free confidential consultation to find out for sure.
Companies who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy will impact your ability to do business, borrow money, etc. Still, bankruptcy is a legal procedure that offers a fresh start for businesses who have gotten into financial difficulty and can't satisfy their debts.
There are two main types of business bankruptcy: Chapter 11 and Chapter 7. For most small business owners, Chapter 7 (liquidation) is a better option but in some situations, Chapter 11 (reorganization) is the way to go. Which bankruptcy chapter is best depends on many factors. Some of those factors
When contemplating which bankruptcy option is best for your business, you need an experienced bankruptcy attorney to review all of your circumstances and options before making a recommendation.
For a free consultation to see if bankruptcy is the best solution for your situation, call 877-408-3328 or schedule here.
A Chapter 11 bankruptcy is a reorganization that allows a company to remain in business and work out arrangements with its creditors. Similar to a Chapter 13 bankruptcy for individuals, a Chapter 11 bankruptcy restructures the debts while keeping business assets and income untouched. There are no debt limits, and a trustee is generally not appointed to run your business or handle your cash (although a trustee can be appointed if you are mismanaging your business or not complying with the bankruptcy law).
This type of bankruptcy provides flexibility on how you do it and what you can accomplish through it. While there are reporting requirements that go into effect as soon as you file, Chapter 11 provides your business with “breathing room” in that you generally have several months before you need to file a plan of reorganization and begin paying the newly reorganized debts. During this time, you continue to operate the business while it takes steps to fix its business problems.
A Chapter 11 bankruptcy is the best choice for a business that needs to eliminate or minimize unsecured debt, prioritize secured creditors, and buy time to reorganize its operations to again be profitable.
Subchapter V Small Business Bankruptcy -
In 2019 the Small Business Reorganization Act (SBRA) significantly reformed the bankruptcy code with the addition of Subchapter V to Chapter 11 Bankruptcy Law. Subchapter 5 made the reorganization benefits of Chapter 11 more accessible to small businesses by making the process streamlined in an effort to help smaller businesses save fees and time.
To qualify, your business must have non-contingent debt of less than $2,725,625, although the CARES Act increases the debt limit to $7.5 million until March 27, 2021 and was extended an additional year through March 27, 2022.
Filing for business bankruptcy means someone else steps in to liquidate your business’s assets and settle its debts (in this case, the bankruptcy trustee).
A corporation or partnership files a Chapter 7 business bankruptcy, which is different
When the liquidation is complete and the proceeds have been paid out to creditors, the business won’t owe any remaining debts. Lease obligations, contracts, utility bills, loans, overdue accounts, and all other business debts will have been paid to the extent possible by the bankruptcy trustee. If creditors aren’t fully paid, typically they choose to write off the debt rather than try to collect from a defunct business. The business owners are off the hook unless they are personally liable for the debts.
In theory, the business owners receive anything left over after the creditors are paid. Typically, however, a business that files for Chapter 7 business bankruptcy has liabilities that exceed its assets, leaving nothing for the owners upon liquidation.
Chapter 7 is best for businesses that see no viable financial future for their business and are too far in debt to dig their way out. As such, there is no need for a restructuring plan, just a way to get out of the business - and out from under its debts - with minimal personal damage.
If you are personally liable for business debts, you may still be on the hook even after your business’s liability is resolved in business bankruptcy. You may need to discharge your personal liability for the debts by filing for Chapter 7 personal bankruptcy or by negotiating a settlement with the creditor(s). Otherwise, the creditor(s) can still come after you for full repayment of the debt even after the business is closed and its liability for the debts are discharged. Personal liability for business debts can be a complicated legal arena and should be discussed in detail with your attorney.
Bankruptcy allows debtors who are unable to pay all outstanding debts to rid themselves of these debts and obtain a fresh start.
As stated by the US Supreme Court, bankruptcy gives "the honest but unfortunate debtor … a new opportunity in life and a clear field for the future, unhampered by the pressure and discouragement of preexisting debt." (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
There are six different types of bankruptcy, each known by the chapter in the Bankruptcy Code in which it is located. Although they differ in form and procedure, they all provide for permanent relief from certain debts. In bankruptcy terms, the debtor's dischargeable debts are discharged. Most debtors file for bankruptcy under Chapters 7, 11, and 13.
The goal of both Chapter 7 and Chapter 13 bankruptcy is a total discharge of debts. The main differences are the eligibility requirements, the length of time the bankruptcy takes, whether prepayment of debts is required, and how much of your property you can keep.
In Chapter 7 bankruptcy you don’t need to repay your debts whereas in Chapter 13 bankruptcy you must repay all or a portion of your debts.
Repaying your debts in Chapter 13 occurs over a 3-5 year period and you must have income sufficient to make full timely payments. You receive a discharge only after you complete your plan. Generally, you will not lose your property in a Chapter 13 bankruptcy as long as you account for repayment of any amount you are behind as well as payments that come due during the plan.
In contrast, in Chapter 7 bankruptcy, a trustee can take the property you owe that is not exempt from collection to sell it and distribute the proceeds to your creditors so that they are repaid as much as possible. Typically you are able to keep some or all of the equity in your home, car, and personal property. Only those who pass a "means test" can file Chapter 7 bankruptcy. Assuming you pass the means test and include all your debts in your paperwork, your debts are likely to be discharged within 4-6 months.
Bankruptcy should be considered a last resort since it adversely affects your credit. Some people rush to file bankruptcy when they become stressed by the creditor harassment that arises out of minor debts. In most cases, creditors and collection agencies will not file a lawsuit against you to collect minor debts since doing so is costly. There are better ways to stop this type of harassment than filing bankruptcy.
Good reasons to file for bankruptcy include multiple wage garnishments, a creditors' threat to repossess property that is important to you, or to delay a foreclosure. Filing for bankruptcy triggers an automatic stay which stops foreclosure, wage garnishment, lawsuits, and collections efforts. If you need to stop foreclosure on your home or repossession of your car and you believe you have the income to pay off these debts and keep this property, then Chapter 13 bankruptcy may be a good idea but it’s always best to consult a bankruptcy attorney first.
If you believe you will have substantial expenses soon it may behoove you to hold off filing bankruptcy as the law limits how often you file for bankruptcy. A Chapter 7 bankruptcy will only erase the debt you have as of the filing date, and your Chapter 13 bankruptcy debt repayment plan may not take into account the future expenses. You can only discharge those debts included in your bankruptcy paperwork, so waiting to file may allow you to include all your debts in the petition and receive the biggest possible discharge.
In general, bankruptcy law is complex and can be confusing for a lay person. It is a good idea to consult a bankruptcy lawyer about your particular circumstances.
While there is no minimum amount of debt to qualify for bankruptcy, certain debt limits do apply to Chapter 13 bankruptcy. The maximum amount currently is $1,149,525 in secured debt (such as a mortgage) and $383,175 in unsecured debt, but it does change periodically.
There are limits on how many times you can discharge your debts in bankruptcy, so if your debt amount is relatively low, it may be a good idea to consider alternatives to bankruptcy now so that filing for bankruptcy remains an option for you in the future.
Filing bankruptcy without a lawyer (or "pro se") is possible. However, the rules and procedures governing the bankruptcy discharge process are extremely complex, and therefore it can be very beneficial to hire an experienced bankruptcy attorney to avoid complications.
Debtors who file bankruptcy pro se are responsible for knowing how the relevant bankruptcy laws and local court procedures apply to them. He/she must also fulfill any credit counseling obligations before filing your case. Failure to comply with these or any other requirements can result in the case being dismissed and filing fees forfeited.
Chapter 7 cases involving few or no assets are more feasible to file on your own where Chapter 13 cases are more complex and generally necessitate the help of an attorney to avoid complications and achieve the desired discharge.
The short answer is possibly. Most consumer debt can be eliminated through a bankruptcy discharge. If you forget to include a debt in the paperwork, however, it will not be discharged. Also, creditors have the opportunity to object to the discharge of any debt. There are 19 categories of debts that are considered "non-dischargeable," including many tax debts, child support, alimony, fines or penalties owed to the government, personal injury debts arising out of drunk driving accidents, criminal restitution, debts based on tax-advantaged retirement plans, and condo fee debts.
Some debts normally considered non-dischargeable can be discharged if a creditor does not challenge your effort to get them discharged. These include credit card purchases worth more than $650 for luxury goods owed to a single creditor and incurred 90 days before filing, debts incurred due to willful and malicious personal or property injuries, and fraudulently obtained debts. Student loans are only discharged if you can convince the court that repaying the debt is an undue hardship for you.
When you file for bankruptcy, your case becomes a matter of public record. This means that anyone can access court records online or call the bankruptcy court to obtain details regarding your case. Your bankruptcy case involves a Meeting of Creditors that is open to the public, though it is unusual for anyone who is not involved in the case to attend. It may be possible to seal portions of your case, but this only occurs in rare instances.
Aside from court records, you may be listed in a local newspaper in relation to any public notices that are relevant to your case. Additionally, lenders you approach to apply for credit, and possibly employers, will learn of your bankruptcy filing if they review your credit history. However, a bankruptcy generally only stays on your credit report for 7 to 10 years, depending on whether you have filed Chapter 7 or Chapter 13 bankruptcy.
Realistically, neither friends nor employers are likely to find out about your bankruptcy filing unless you disclose it to them, unless they look for it specifically.
The impact of bankruptcy on your business depends on which chapter you file. Only individuals can file Chapter 13, so it can be used to reorganize the personal and business debts of a sole proprietor, but it will not affect a corporation, partnership, or limited liability company. A business will file under Chapter 7 or Chapter 11.
Filing a Chapter 7 bankruptcy can wipe out your sole proprietorship's debts as it is not a separate legal entity from you personally. The business assets will be listed in the bankruptcy because they are your personal assets as well. A bankruptcy trustee will use the assets of a sole proprietorship to pay creditors back to the greatest possible extent. However, if you file a Chapter 7 bankruptcy your business will not be impacted if it is organized as a partnership, corporation, or limited liability.
Chapter 11 bankruptcy is a business reorganization bankruptcy that allows your business to continue operating while reorganizing the debts according to a debt repayment plan. It is complicated, expensive, and appropriate for business owners who are trying to rebuild their businesses and continue operating. There are expedited proceedings available for small business debtors who are trying to restructure the business, but you only have 300 days to propose a plan to repay creditors.
It is common for people to file for bankruptcy to stop a foreclosure or repossession of vehicles or equipment. Filing for bankruptcy triggers an automatic stay, requiring creditors to stop their collection efforts - including attempts to foreclose on or repossess property. Whether the bankruptcy fully stops foreclosure or repossession, or just delays these events, depends on the chapter of bankruptcy you file.
Filing Chapter 7 bankruptcy allows you to delay a foreclosure sale for 3-4 months. It can buy you time to negotiate with a lender to modify the change the loan period or loan terms of the mortgage. However, a lender may move to lift the stay. Filing for Chapter 13 can not only stop the sale, but also allow you to propose a debt repayment plan that will cover arrearages as well as mortgage payments that come due during bankruptcy. As long as the plan is approved and you make timely payments on this plan over the 3-5 years of bankruptcy, you can avoid foreclosure altogether. Moreover, you may be able to strip any junior mortgages that are not secured from your home.
While a Chapter 7 automatic stay stops a lender from repossessing your car, the lender can and probably will ask the court to lift the stay, unless you show that you are going to catch up on car payments or cure a default. The lender will need to show the court that its interests are inadequately protected because you have failed to make timely payments on the loan or you are in default. In most cases, if you cannot afford to catch up on car payments or cure your default, the court will lift the stay and will not stop a lender from repossessing your vehicle.
However, you should be able to stop a repossession altogether if you adequately address arrearages and upcoming car loan payments in your Chapter 13 debt repayment plan. To keep your vehicle, you will also need to make adequate protection payments from the date your file for bankruptcy until the date the judge approves the plan.
Medical debt is one of the primary causes of bankruptcy for individuals. Medical bills usually represent a form of unsecured debt, and they can be discharged through bankruptcy.
In terms of how your debts are prioritized in repayment, the trustee handling your bankruptcy case is will pay off secured debts (such as mortgages, car, or other debts secured by property) with any available assets first. Medical debt, like credit card debt, is not likely to be tied to any collateral, meaning that medical creditors in many cases are left without payment after secured debts and higher priority unsecured debts (like child support and taxes) are paid off. Whether you file for Chapter 7 or Chapter 13 bankruptcy can often impact the extent to which any unsecured debts are satisfied.
Student loans are considered non-dischargeable unless you can prove to the court that repaying the loans would be an undue hardship. You must file a Complaint to Determine dischargeability with the bankruptcy court, which will initiate a separate adversary proceeding.
Different courts use different undue hardship tests, but most courts only grant a student loan discharge if you suffer a serious disability that prevents you from working, you have dependents, or you are elderly. Under one test, known as the Brunner test, you can only obtain a discharge if: (1) repaying student loans would result in you and your dependents living in impoverished circumstances, unable to maintain a basic standard of living; (2) your situation will continue over most of the student loan repayment period; and (3) you tried in good faith to repay the loan. Another hardship test looks at the totality of the circumstances. While it is difficult to pass these tests, it is not impossible.
If you cannot pass the undue hardship test used by your court, you will owe student loans after a Chapter 7 bankruptcy is over. However, you may be able to pay a reduced student loan payment during your debt repayment plan. Regular payments will resume after you have completed your Chapter 13 plan.
When the burden of debt gets out-of-hand and creditors are hounding you daily, the prospect of bankruptcy protection can be very appealing. While Chapter 7 is frequently the more attractive choice due to the ability to discharge the most unsecured debts, there are specific requirements for Chapter 7 eligibility that you may not meet.
If your income over the last six months was higher than the median for a household of your size and your disposable income is too great, you will not be eligible for the options afforded to debtors by Chapter 7 bankruptcy. Determining eligibility can be complex, but a skilled attorney can help advise you on how best to proceed.
Chapter 13 Advantages
In some situations, Chapter 13 may offer a more appropriate solution to your unique financial situation, even if you are eligible for Chapter 7. Filing for Chapter 13 bankruptcy has the following advantages:
There is no universally applicable rule of thumb in deciding whether to pursue Chapter 7 or Chapter 13, and it is advisable to consult with a competent bankruptcy lawyer about your own situation.
A successful Chapter 13 bankruptcy case may offer a desirable path forward to those who are earning income but are unable to keep up with their debts. It allows debtors to restructure their payment arrangements and satisfy these obligations over an extended period of time. For some, however, this may actually be a disservice. Chapter 13 repayment plans require that a large percentage of your outstanding debts, both secured and unsecured, be paid back in full.
Filing for Chapter 7 bankruptcy offers a variety of advantages, but requires that the filer qualify by taking the means test, demonstrating that they do not have sufficient disposable income to pay back the debts they have accrued. If you do not meet the qualifications for Chapter 7, it is still possible to file for Chapter 13 bankruptcy.
Chapter 7 Advantages
Filing for Chapter 7 bankruptcy is an advantageous decision for many people. It has the following advantages:
When you have very limited disposable income and little or no real property, Chapter 7 bankruptcy is an excellent means to discharging most, if not all of your unsecured debt.
One of the primary benefits of filing for bankruptcy is the protection the bankruptcy court offers you from creditors and collectors during your bankruptcy proceedings. When you file, the court grants you an ‘automatic stay’ on the collection of debt, which means that all creditors are legally barred from attempting to recover money from you. It is possible for a creditor to regain the right to attempt collections, but only if they receive special dispensation from the court.
The automatic stay can also temporarily stop foreclosure proceedings, utility shut-offs, and evictions. However, the stay will likely not apply to certain proceedings, such as legal actions to collect child support or alimony, and certain IRS matters. In some cases, creditors may also ask the court to lift the stay.