Deciding What Type of Business Bankruptcy to File
Opening a small business is exciting but risky. According to the Bureau of Labor Statistics, about 20 percent of small businesses fail in the first year. By the end of year five, 50 percent have failed. And after 10 years, 70 percent have gone out of business. For many small business owners, seeking bankruptcy protection may become a necessity. The question is what type of bankruptcy is the most viable choice.
If you are a small business owner contemplating bankruptcy, the key question is whether you want to continue operating the business. Chapter 7, also known as liquidation, is the most common form of bankruptcy. Generally, filing Chapter 7 requires you to close the business after all its assets are sold to repay creditors. At the same time, however, all debts are discharged, giving you a clean slate to start a new venture if so desired. Furthermore, if you are a sole proprietor filing for Chapter 7, you may be able to resume your business after the bankruptcy is over.
Another option is a Chapter 11 bankruptcy, also known as a reorganization. It is typically utilized by larger companies but could be viable if your business is organized as a corporation or LLC. In Chapter 11, you submit a reorganization plan for approval by creditors and by the court. The plan may involve debt modification and selling off of certain assets. The advantage of Chapter 11 is that it allows you to stay in business.
Chapter 11 is often too expensive and complex to be of use to small businesses, but a more compact and affordable type of reorganization is now available, known as Subchapter V. To qualify, your business can have no more than $7.5 million in debt. This debt limit will be lowered to approximately $2.7 million on March 27, 2022. The limit had been temporarily increased due to COVID-19. So if your small business is struggling and has more than $2.7 million in debt, you may want to talk to a lawyer about filing before the limit drops. Please see our page dedicated to Subchapter V for more details.
Finally, if you are a sole proprietor with regular income and you don’t want to risk losing your assets in Chapter 7, you may want to file Chapter 13 bankruptcy. This form of personal bankruptcy can be used to restructure business debt and repay it over three to five years.
Choosing the right type of business bankruptcy requires careful analysis and forethought. My firm, The Law Offices of Michael Jay Berger in Beverly Hills, is here to help. I know the relative benefits and drawbacks of each option and can explain them in detail and guide you through the process. Please call me at 310-271-6223 or contact me online to schedule a free attorney consultation.