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Small Business Bankruptcy

Small Business Bankruptcy – Keep Your Doors Open!

Most small businesses are extensions of their owners in many ways. Small business owners almost always personally guarantee the business debt. Sole proprietors, or single-member LLC’s often need bankruptcy to survive. Filing bankruptcy as a small businessman doesn’t always mean your business shuts down. Small business bankruptcy can keep the doors open.

Most small business bankruptcy cases are filed under Chapter 7 or 13, not subchapter V, the Small Business Reorganization Act. This article discusses small business bankruptcy the way most are actually filed today, in Chapters 7 and 13.

Determining whether your small business should file bankruptcy requires more analysis than an individual consumer bankruptcy. Ideally, you’ll get advice from an attorney who has a business background, as well as consumer and business bankruptcy experience. Small business often don’t file as a business bankruptcy. Because the debt is personally guaranteed by the owner of the business, the bankruptcy turns out to be a personal bankruptcy, not an actual business bankruptcy.

Small Business Bankruptcy

Small Business Bankruptcy – What Happens When I File?

When small businesses file, they don’t always go out of business. If staying in business it the goal, the first question concerns continued operation. Since the bankruptcy will close down lines of credit, you need to be able to continue operations without credit. At least for long enough to rebuild credit relationships with key vendors. When this can be accomplished, you next examine what assets the business owns, and which assets you as the business owner own. This sometimes makes a big difference, since personal exemptions don’t apply to property owned by the business.

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Bankruptcy and Chapter 7

In order to file a Chapter 7, you need to have a plan for operation without credit. And, if you have accounts receivable, your bankruptcy timing must carefully consider this. Most people think that you cannot continue operation of your business after Chapter 7. But if you carefully time your filing, you can avoid losses. 

For example, a real estate agent might have a closing schedule for a future date, and expect to receive a commission check. If the bankruptcy is filed before the closing, the commission check belongs to the trustee. But if the bankruptcy filing is delayed, and the commission received (and properly spent) before the bankruptcy filing, the money is not lost to the trustee.

Bankruptcy and Chapter 13

Small businesses file chapter 13 all the time. It is not necessary to file a Chapter 11, or a sub-chapter V in order to file bankruptcy for your small business. You must qualify under the debt limitations under 11 USC 109. See adjustment of dollar amounts at the bottom of the page. By filing Chapter 13, legal fees are more affordable, and easier to administer. Still, the Chapter 13 trustee requires periodic reports and wants to confirm compliance with tax regulations.

In Chapter 13, it is still possible to borrow money for business operations. If your business requires credit to operate, make sure that your bank is on board with your Chapter 13 filing. Many will agree to continue to fund your business, especially if you have pledged collateral to secure the loan. Your credit limit may be reduced, however, because of the bankruptcy filing. Small business bankruptcy usually does mean reduced credit, however.

Filing Chapter 13 means you get to keep all of your assets. These assets might be at risk in a Chapter 7. Tools, business fixtures, and inventory could be sold by a Chapter 7 trustee. In Chapter 13, however we often place low, liquidation value on these items and easily keep them for the use of the business.

When your business is on the line, get help from a board certified specialist. We’ve helped keep businesses alive for hundreds of local businesses.

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