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Georgia is home to many small business owners, startups and micro-enterprises, which contribute significantly towards employment. However, these noble endeavors also face some of the toughest problems in their finances. Often, due to unavoidable reasons, they have to close their shops for good to solve their financial troubles. Fortunately, the government recognizes their contribution to the economy and has made provisions in the law to give them a fresh start. This provision is known as bankruptcy, and a small business bankruptcy attorney deals with the cases involving it. Despite the social stigma associated with the word bankruptcy, it is a useful tool for your business when it is overburdened by debts, without any solution in sight.
Can I File a Bankruptcy for My Business?
Business owners file bankruptcy when a business can not repay its debts with its current sources of income. Instead of a complete closedown, bankruptcy can help restructure the business debts and allow the business to remain operational. The amount and nature of these debts vary a lot depending on the circumstances. To cover all such situations, the government has divided the bankruptcy law into different chapters.
Before filing for a particular type of bankruptcy, you need to know who is eligible for this provision. Small businesses are of different types. The basic business with any corporate standing is a proprietorship. The person who owns this legal entity is personally responsible for all the finances of the operation.
Partnerships exist between two or more people who are jointly responsible for the liabilities and profits of a business. Partnerships are of two types, general and limited. The former type accounts all partners equally for unlimited liabilities on behalf of the business.
A Limited Liability Partnership (LLP) incurs all responsibilities on one general partner. He is responsible for managing the daily operations of the business. The other partners are merely shareholders on account of the investment in the company. This is important to know because the general partner can potentially lose personal assets if an unfortunate event forced such liabilities on the company, whereas the other partners only risk losing their investment in it.
A micro or small business can have single or multiple stakeholders, but the business is a separate entity, with its own assets and finances. Thereafter, mid to large enterprises have different hierarchies, investors, and management.
A proprietorship cannot apply for bankruptcy by itself, because it is not a separate legal entity. Instead, the owner of the proprietorship has to file a personal bankruptcy. The owner can protect all personal and financial assets by declaring the sources of income in the bankruptcy schedules.
A micro, macro, and other medium or large businesses represent Limited Liability Company (LLC), or a Corporation, further divided into S-Corp and C-Corp. These organisations can file for different chapters in the bankruptcy code, like Chapter 7, Chapter 11 and Chapter 13.
Chapter 7 Business Bankruptcy
Chapter 7 bankruptcy, also called ‘straight bankruptcy’ or‘liquidation’ allows an individual or a business to clear debts and start afresh. In this filing, the ‘non-exempt’ assets of a business are sold off to pay the creditors. Chapter 7 business bankruptcy helps to discharge almost all of the debts.
There are some exceptions to the type of debts to be discharged. If a creditor raises an objection within 60 days, the debt clearance is stayed. These objections usually arise from a malicious activity on your behalf, such as fraud, theft, embezzlement, bodily or property harm. Other obligations such as criminal fines, fees, some types of taxes and debts which are not mentioned in the bankruptcy schedule.
While this may be useful in dire circumstances, the business risks losing some or all of its property. Moreover, the credit score nosedives by a significant amount, which makes acquiring future loans or credit very difficult. This option is viable for business owners who have no scope of repaying their debts in the future by any means. To be eligible for applying for Chapter 7 bankruptcy, the business also has to pass a ‘means’ test.
Chapter 11 Bankruptcy
When you need a breather to pay your business’ debts and avoid the termination of business, you can opt for a chapter 11 bankruptcy. This chapter is more commonly known as ‘reorganization’ in the bankruptcy code. As it is most useful in restructuring existent debts without incurring any sort of a penalty from the creditors.
Chapter 11 bankruptcy grants a debtor relief from legal actions from creditors, such as collection efforts, lawsuits, and actions against property such as filing liens or a foreclosure. This petition brings an automatic stay from all such activities from creditors. It allows the debtors to remain in possession of immovable assets and restructure the existing debts.
The restructuring is usually carried out in presence of the creditors by negotiating the terms. The debtors can then avail of various types of relief such as
- an increase in the duration for repayment
- reduction in the interest rate if it has declined since the initial agreement.
The debtor has a maximum period of 120 days to file a plan for the reorganization of the debts. Solicitation of the said plan has a maximum period of 180 days.
The businesses which can file a Chapter 11 bankruptcy are a proprietorship, partnership or a corporation. Each business risks the liquidation of a part of or all the assets in a bankruptcy case. However, risk to personal assets only extend in the case of a proprietorship or a partnership, wherein the owners or the debtors may have to file for personal bankruptcy as well.
Chapter 11 bankruptcy Process
A U.S. Trustee or a bankruptcy administrator usually monitor this case in conjunction with a creditors’ committee for compliance, paying close attention to the activities of the business and the debtor in possession. In the case of small businesses, the proceedings are a bit different. First of all, the creditors’ committee may be mostly non-existent or inactive. The deadlines and filing dates lie within narrower margins than in other Chapter 11 cases. Procuring extensions are difficult, and the case is handled much faster by the U.S. Trustee. In such cases, acquiring the aid of an expert small business bankruptcy attorney should be your first priority.
Chapter 13 Bankruptcy
This is by far the most desirable course of action for small businesses, but it comes with a conditional clause. If you or your business has a regular source of income, you can make a plan to repay all or a part of your debts with regular payments. This is why it is called a ‘wage earner’s plan’. Under this code, all current collection efforts of creditors or future plans of starting one are halted. Furthermore, chapter 13 helps to stop foreclosures of property assets immediately.
So, why this is the most desirable option for small businesses? It allows them to save their immovable properties and other essential assets from being sold off to pay the creditors. Under this procedure, the debtor can plan to make repayments in three years up to a maximum of five years depending on the income as compared to the applicable state median.
The condition for Chapter 13, is that it is only available for proprietors or self-employed individuals. A corporation or a partnership can not avail of the provisions in Chapter 13 as a legal identity. You also need to fulfill a number of eligibility requirements, like
- Limits on secured and unsecured debts
- Compliance procedures with credit counselling agencies and courts
- Proper filing of the petition, including all the financial assets, income, expenditures, taxation and other liabilities.
Advantages of filing Chapter 13 bankruptcy
Chapter 13 has many other advantages, including the option to reschedule the payments over a longer period, thus reducing the installment, limited protection of cosigners and third parties with a ‘consumer debt’ liability, and a consolidation of loan payments, wherein the debtors transact only with the trustee who distributes the payments to the creditors. These cosigners or third parties can file a Chapter 13 petition jointly or separately.
All these benefits do incur a hefty cost.
Will filing bankruptcy affect my credit?
After filing for a Chapter 13 bankruptcy, your personal credit rating takes a major hit which remains on file for up to 10 years. You probably lose all the credit cards, and some of your obligations, such as child support, alimony, and student loans, if any, will still need to be paid.
Get Professional Help from David Galler, Small Business Bankruptcy Attorney
No matter which option you choose, you or your business needs to fulfill a number of criteria. Filing a bankruptcy involves a considerable amount of documentation and court visits. Additionally, you need to be aware of all the eligibility requirements.
In such situations, it is advisable to consider professional help. Fortunately, Galler Law has exclusive experience in dealing with small business bankruptcy litigation. Is your business stuck between a rock and a hard place? Contact Galler Law now for an initial consultation to choose the best options for saving your business.