Bankruptcy Options for Small Businesses in Financial Distress

Navigating financial challenges is a common part of running a small business. But when the burden of debt becomes too heavy to bear, owners have legal alternatives to shutting down the enterprise. The primary bankruptcy options that allow small businesses to stay in operation are Chapter 11 and Chapter 13. Which option is best suited depend on various factors, including the size of the business, its type and level of debt and its ownership structure.

Chapter 11 bankruptcy provides a comprehensive framework for reorganizing business finances, restructuring debt and working out a plan to repay creditors. The 2019 Small Business Reorganization Act created a streamlined version known as Subchapter V, which makes Chapter 11 more accessible to smaller enterprises.

Subchapter V calls for the debtor to undertake a repayment plan to settle debts over a period of three to five years. Here are some of the main advantages of the remedy:

• Reduced administrative burdens and costs — The debtor can pay administrative expenses over the term of the plan rather than having to pay them in a lump sum up front.
• Hands-off trustee — Although a trustee will be appointed as a fiduciary for creditors, the trustee will not operate the debtor’s business.
• No creditors committee or creditor approval — Unlike a traditional Chapter 11, there is no formation of a committee of creditors who could object to the plan.
• Ownership Retention — Equity holders of the business can retain their interests without the need to pay the debtor’s creditors in full, making it easier to continue operations.

To qualify for Subchapter V, the debtor must be engaged in commercial or business activity. The debtor’s aggregate secured and unsecured debts cannot exceed $7,500,000. At least 50 percent of that debt must have arisen from business activity.

Another remedy, in the case of a sole proprietor of a business, is Chapter 13. This type of bankruptcy is designed for individuals struggling with debt who are able to pay off some of their creditors if given additional time. But it is also available to sole business owners who have used their personal credit to finance the enterprise

The main benefits of Chapter 13 for sole proprietors are these:

• Debt consolidation — The debtor can include personal and business debts in a single repayment plan.
• Asset protection — The sole proprietor can usually retain his or her personal assets, such as a home.
• Retention of business control — The trustee appointed to supervise the repayment process has no role in business operations.

Like Subchapter V, a repayment plan under Chapter 13 lasts three to five years. With a few exceptions, any unsecured debts remaining upon the completion of the repayment plan are wiped out.

If you are a small business owner struggling to stay afloat, the Law Offices of Michael Jay Berger in Beverly Hills can help you work through the challenges successfully. Call today at 310-271-6223 or contact me online to schedule a free initial consultation.