Can I Keep My Business While Filing Bankruptcy?
The Three Types of Bankruptcy
There are three main types of bankruptcy, which are known as Chapter 7, Chapter 11, and Chapter 13. Chapter 7 is known as liquidation and it is for businesses and individuals whose debts are so overwhelming that restructuring them using one of the other chapters is not feasible. All assets are sold off to pay down the debt that is owed to creditors. At the end of the liquidation process, all remaining debt is discharged.Chapter 13 is typically only for individuals, but it can be used for sole proprietorships since that business status is indistinguishable from individuals. The goal for Chapter 13 is to reorganize debt and to repay it based on a repayment plan approved by the bankruptcy court. Chapter 11 allows a business to restructure its debt and continue operating under a court-appointed trustee. As with Chapter 13, debt is repaid over time according to a repayment plan.
Since Chapter 7 is the type of bankruptcy that will most likely impact your ability to operate a business during the process, we will spend most of our time on the possibilities under this chapter. We will begin by looking at the type of business you have and how filing for bankruptcy will affect you and your business.
While Chapter 13 might be a better option, you can file Chapter 7 as a sole proprietorship However, if you do file for Chapter 7, the court may insist that you close your business, at least temporarily. The trustee will need to assess the value and potential sale price of your assets, which can take about two months. This will also prevent you from incurring additional debt during this time and additional creditors from filing legal claims.If your business operates without assets, as with service providers, freelancers, or consultants, you may be allowed to keep your business open during the process, particularly if you don't have a huge risk of adding additional debt or other liabilities. However, if the trustee finds that there are significant accounts receivable (such as unpaid commissions) that could be collected, the trustee may require you to cease operations. Any money earned during the process does become a part of your bankruptcy.
Partnerships and Multi-member LLCs
If your business has more than one owner, and you are filing personal Chapter 7 bankruptcy, your part of the business becomes subject to the bankruptcy and the trustee could take any profits paid to you during the bankruptcy process to satisfy debts. Typically, however, the bankruptcy court will not interfere with the business operations or seize its assets. Economic rights to receive income can be sold, but your share of the partnership cannot be transferred or sold.You may be required by your partnership agreement to sell your interest in the business before entering bankruptcy, the money from which would then become part of your bankruptcy estate. If your agreement contains a buy/sell clause, you will need to adhere to that provision or you could face a lawsuit from your partners. Prior to filing for bankruptcy, you should consult an attorney to verify your obligations and assess your options with regard to your stake in the company.
Single or majority owners of corporations face the bigger risk of losing their business under a Chapter 7 bankruptcy. The bankruptcy trustee is able to control your shares or membership and vote to liquidate the company's assets to pay off creditors. Whether the trustee does this or not depends on a cost/benefit analysis. The trustee will assess the value of the company's assets and decide how much they could be sold for, or if there are any exempt assets.Many companies owe at least as much as its assets are worth, so in those cases, liquidation would not make sense, and the trustee will likely allow the company to continue operations. However, if there is a modest or low amount of debt, and many non-exempt assets, the trustee will probably require the corporation to dissolve and the assets sold. The proceeds from the sale would then be distributed to your creditors, and your company's creditors will be included.
Corporations With Two or More Owners
In a case where you are one of multiple owners of a corporation, the situation will be handled much like a partnership or multi-member LLC. Unless you are a majority shareholder, the trustee will not be able to call a meeting to force the corporation to dissolve. The stock you have from the company will still be a part of your personal bankruptcy estate but has little value unless another shareholder wants to purchase it.
Both business and personal debts can be included in a Chapter 13 bankruptcy, but only for sole proprietors. You are allowed to keep your assets during Chapter 13 since you are just restructuring your debt. This may be a good bankruptcy option if your business is still making money because you are likely to be allowed to keep your business running while paying a lower amount on non-priority unsecured debt such as personal loans, credit cards, and utility bills.The one issue that could arise with Chapter 13 could stem from keeping a high inventory of products or having expensive equipment on hand. This is because you'll have to file a bankruptcy exemption to protect your property from bankruptcy and most significant business assets cannot be exempted. This means they will be included in the payment plan and you'll have to fully repay any outstanding debts in three-to-five years. Expensive equipment or inventory will significantly increase your monthly payment.
Since Chapter 11 is only for partnerships, corporations, and LLCs, it won't apply to personal bankruptcies. Essentially, Chapter 11 is handled for businesses in much the same way as Chapter 13 is for individuals. The company will keep operating under a Chapter 11 bankruptcy filing but will have expanded requirements, including the submission of continual operation reports. Additionally, creditors must agree to the repayment plan. The business would only be in jeopardy if the Chapter 11 converts to a Chapter 7.
Consult a Bankruptcy Attorney
Bankruptcy law is extremely complicated and you could easily find yourself overwhelmed with the various terms, options, and requirements of each type of bankruptcy, especially if you are trying to keep your business running at the same time. For this reason, we recommend you consult a bankruptcy attorney before filing bankruptcy. Whether you end up hiring one or not is up to you, but the initial consultation can help you clarify the best option for your needs.Bankruptcy attorneys are going to guide you to which bankruptcy option is in your best interests in terms of how you can keep as many assets as possible while getting you back on stable financial ground. If your goal is to save your business, a lawyer can advise you on the best path forward toward meeting that goal. It might not be possible to save your company, but hiring a lawyer gives you much better odds.As you can see, the answer to whether you can keep your business when you file bankruptcy is complex and really depends on a variety of factors as discussed here. Contact Stockton and Stern LLC today to meet with one of our experienced bankruptcy lawyers who can add clarity to your situation and help you meet your financial goals.