Navigating Business Bankruptcy for Small Business Owners

Oct 3, 2023

Attorney W. Mark Jump

Financial difficulties can affect businesses of all sizes, including small businesses. If you’re a small business owner and you feel like you’re drowning in debt with no way out, bankruptcy may be a viable option. In this blog post, we’ll discuss what bankruptcy means for small business owners and their company or personal finances, the difference between Chapter 7, Chapter 11, and Chapter 13 bankruptcy, what the process of filing bankruptcy looks like, and what to expect after filing for bankruptcy.

Understanding Small Business Bankruptcy

Bankruptcy can help you manage overwhelming debt from loans and other sources and get a fresh start. It’s a legal process through which your business’s debt is either eliminated or placed in a repayment plan. You may also need to liquidate your business assets to help repay your loans and other debts. Whether you want to close your small business or are determined to keep it running, bankruptcy may allow you to do so. Understanding bankruptcy law – as well as working with a knowledgeable bankruptcy lawyer – can help you make the right choices for the future of your company and even your personal finances.

Know Your Debt Relief Options: Chapter 7, Chapter 11, and Chapter 13

Small businesses can file under different chapters of business bankruptcy: Chapter 7, Chapter 11, and Chapter 13. Each bankruptcy chapter has its own rules and outcomes, such as what happens to your business loans and personal loans when you file for bankruptcy. The right chapter for your business depends on factors like your financial situation and your personal and business goals.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. It can be a straightforward path to relieving business debt and may be an option for businesses whose overwhelming debt is preventing continued operations. However, it also typically means the end of your business. After you file for Chapter 7 bankruptcy, you must sell your non-exempt business assets to repay your debt. Unsecured loans, debt from credit cards, and other remaining qualifying debts may be discharged, freeing you from the obligation of paying them back. While Chapter 7 bankruptcy usually means the end of your business, it can also provide a fresh start.

Chapter 11 Bankruptcy

If you want to keep your business and believe it can become financially viable, choosing to file for Chapter 11 bankruptcy may be a solution. While it is a more expensive and complex option, Chapter 11 allows you to create a reorganization plan, which outlines how your loans and debt will be restructured and repaid over time. The repayment process typically takes a few years. During Chapter 11 bankruptcy, you’ll continue to manage your business operations while working with creditors and the court to create a sustainable debt repayment plan. Chapter 11 offers the potential for business survival and a fresh start with reduced debt burdens.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is typically associated with individuals, but it can also be an option for some owners of small businesses. If you meet certain criteria, you can file for Chapter 13 bankruptcy and use it as an opportunity to reorganize your debts using a reorganization and repayment plan that is approved by the court. The repayment plan usually lasts three to five years. You also won’t have to liquidate any of your assets. This type of bankruptcy may be an option for you if your business is structured as a sole proprietorship or if you have personal liability for business debts. If that’s the case, then you may be able to combine your business debt and personal debt into one repayment plan, making it easier to manage your debt.

While there are multiple chapter types to choose from, bankruptcy isn’t the only option out there. Alternatives to filing bankruptcy include debt restructuring, negotiating with creditors, and selling assets. The best way to decide which option is right for your small business is to talk to a business bankruptcy lawyer.

When Should Small Business Owners File for Bankruptcy?

While bankruptcy should typically be a last resort, it can be a viable option for businesses under certain circumstances. There are specific signs owners can look for to determine if they should start considering bankruptcy, including financial signs, operational signs, and legal considerations.

Financial Warning Signs

If your business debt is mounting and it feels impossible to repay it, and your interest payments are taking up a large portion of your revenue, it may be time to consider whether you should file for bankruptcy. Consistent losses are another sign to look for. If your business is failing to make a profit for an extended period of time, this may be a sign of deeper financial issues. Additionally, if your business experiences frequent cash flow shortages or is consistently unable to cover operational expenses, your financial situation may be dire. If debt or collections actions are mounting and you’re unable to pay your creditors, it may be time to ask an attorney about filing for bankruptcy.

Operational Warning Signs

Operational signs to look for include declining sales and revenue for a prolonged period of time, which may indicate that your business model or market conditions are causing severe problems. Employee dissatisfaction and high employee turnover can also be signs that your business is in distress. Having an excess of inventory that’s causing financial strain is also a sign that it’s time to take a closer look at your financial situation.

Legal Considerations

It may be time to consider bankruptcy if your business is facing lawsuits or legal disputes that it can’t afford to settle. Frequent contractual breaches with lenders, vendors, and others may worsen your financial standing, making bankruptcy a helpful option. Pressure from creditors can also be a sign that it’s time to consider bankruptcy.

Before filing for bankruptcy, be sure to talk with a bankruptcy lawyer so you can discuss all your options and choose the one that’s right for your small business and your personal and professional goals.

How to Prepare Your Company for Bankruptcy

If you decide that filing bankruptcy is the best option for your small business, there are steps you can take to make navigating the bankruptcy process easier. Before you file for Chapter 7, Chapter 11, or Chapter 13, you’ll need to gather financial documents like tax returns, income statements, balance sheets, and a list of your assets and liabilities. It’s also important to have a clear picture of your loans and debts. This includes secured debts, which are backed by collateral like your business property, and unsecured debts, such as credit card debt. Understanding the nature of your debts will help determine the most appropriate bankruptcy chapter.

Once you have a clearer picture of your finances, it’s helpful to consult with a bankruptcy attorney. Bankruptcy can be complex, so having a professional on your side can help you navigate the process and make informed decisions. With this professional guidance, develop a clear strategy for how you’ll approach bankruptcy. This should include a timeline and your personal and professional goals.

How to File

Once you’ve decided to file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, there’s specific paperwork that you’ll have to fill out. A bankruptcy petition is a formal document that initiates the process of bankruptcy. The petition includes information about your finances, assets, debts, loans, and other relevant details. An attorney can help you fill out and file the bankruptcy petition.

Once you file for bankruptcy, an automatic stay is triggered, which stops collections and pauses the foreclosure process. This prevents further financial damage while your bankruptcy case proceeds.

During the process of bankruptcy, there are additional forms and schedules you’ll need to fill out and file to help determine how your small business or personal debts will be treated. An attorney usually offers services to help you complete and file these as well.

Navigating the Bankruptcy Process

A lot happens after you file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy. You will attend a 341 meeting, during which creditors get to ask you, the debtor, questions about your finances, loans, tax returns, and your bankruptcy case.

If you file for Chapter 13 bankruptcy, you’ll also need to present the bankruptcy court with a proposed repayment plan. This plan outlines how you will repay your debts over a given time frame. The court must approve your repayment plan before it can go into effect.

It’s important to be aware that different types of small business or personal debt are treated differently during bankruptcy. If you have secured debt, such as mortgages or car loans, you can usually either surrender the collateral or reaffirm the debt. Unsecured debts, like credit card debt, may be partially or fully discharged.

Get Support from a Lawyer

Small business owners can greatly benefit from working with an attorney who’s familiar with bankruptcy law. Bankruptcy attorneys specialize in this area of law, so they’re extremely knowledgeable about Chapter 7, Chapter 11, and Chapter 13 bankruptcy, as well as what to expect during bankruptcy. Through a variety of services, attorneys provide valuable support and guidance to make the process easier to manage. They’ll also make sure that you understand your rights and obligations.

Additionally, attorneys can ensure that you file the bankruptcy petition and other necessary forms correctly. They’ll also help you make the most of bankruptcy by striving to minimize its impact on your business and personal finances.

If you’re located in the Columbus, Ohio area and are considering filing for bankruptcy, contact Jump Legal. We have years of experience guiding small business owners through bankruptcy and helping them get a fresh start. Contact us at (614) 481-4480 to learn more about our services.

How Bankruptcy Affects Small Businesses

When deciding if bankruptcy is the right solution for your small business, it’s important to consider how bankruptcy will affect your business and your finances. You may have new financial responsibilities, and may have to make difficult decisions regarding the operation of your business. However, bankruptcy also offers benefits, like the chance to start over with a clean slate. Be sure to talk about all aspect of bankruptcy and bankruptcy law with an attorney before filing for bankruptcy.

What to Expect After Bankruptcy

Once you’ve successfully filed for bankruptcy and navigated through the initial phases of the process, you’ll enter a new chapter in your small business journey. While bankruptcy can provide much-needed relief from overwhelming debt, it’s essential to understand what to expect in the aftermath.

Even after your bankruptcy is finalized, you may have ongoing obligations. In cases of Chapter 13 bankruptcy, you’ll have to adhere to a repayment plan that’s been approved by the court. You must also fulfill any agreements made with secured creditors.

Bankruptcy is also a chance to reset your financial foundation. Take proactive steps to improve bad credit by paying bills on time, managing your finances responsibly, and establishing new lines of credit cautiously. Over time, your credit score can improve, offering you greater financial flexibility.

After bankruptcy, you’ll need to carefully manage your finances to avoid falling into the same traps that led to your financial difficulties initially. This may involve creating a strict budget, monitoring your cash flow closely, and seeking professional financial advice to ensure long-term stability.

Impacts of Bankruptcy

While bankruptcy can provide new opportunities, it can also bring new challenges to businesses. Bankruptcy can have impact the employees on your payroll, as layoffs or changes to employment terms may become necessary. The reputation of your business may also be impacted by bankruptcy, making it important to properly communicate the situation to your customers, clients, and partners to mitigate damage. It will also become extra important to manage relationships with your vendors. Additionally, it may become challenging to get loans for a period of time following bankruptcy.

Benefits of Bankruptcy

Bankruptcy can be a strategic financial tool allowing you to regain control of your financial situation, protect essential assets, and chart a course for a more stable and prosperous future. Perhaps the most immediate benefit of bankruptcy is the relief from the burden of unmanageable debt. Bankruptcy allows you to restructure your finances, eliminate certain loans and debts, and create a more sustainable business model. This fresh start can pave the way for future success.

Filing for bankruptcy also triggers an automatic stay, which legally prohibits a creditor or business bank from pursuing collection actions against you. This means no more harassing calls, threats of legal action, or aggressive collection tactics.

In Chapter 13 bankruptcy, you can propose a repayment plan that allows you to pay back your debts over an extended period, making it more manageable for your business. Depending on the type of bankruptcy you file, you may be able to keep certain assets while eliminating debt. This can protect critical business assets and help your company remain operational.

Small business bankruptcy is a challenging but potentially beneficial process for owners of smaller businesses facing overwhelming debt. By understanding Chapter 7, Chapter 11, and Chapter 13 bankruptcy, as well as the preparation required and the importance of legal support, you can make informed decisions about your personal and professional financial future. To learn more about small business bankruptcy and our services for business owners, contact Jump Legal.

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