Subchapter V Can Protect Personal Assets During a Small Business Wind Down
Small business is a critical component of the U.S. economy. However, starting a business is risky and many ventures fail. Startups and even businesses of some duration may be partially capitalized by the owners’ personal funds and debt obligations. When the business ceases to operate, the owners can be left with crushing debt burdens. Fortunately, there is a remedy available under the bankruptcy code, known as Subchapter V.
Subchapter V was enacted to assist distressed small businesses with reorganizing their debt so as to emerge solvent. Chapter 11 of the bankruptcy code was recognized to be too complex and expensive to be of use to the typical small enterprise. Subchapter V is a streamlined process that provides protection from creditors while allowing owners to retain a significant amount of their personal assets.
There are numerous requirements for filing Subchapter V, one of which is that the debtor must be engaged in commercial or business activities. This has been interpreted by the courts to include aspects of winding down the business, even though actual operations have ceased. As such, an owner can enjoy protection from creditors during the wind down and protect whatever equity remains. Note that the activities undertaken need not have anything to do with the company’s discontinued products or services.
However, owners of failing companies often cease operations prior to filing bankruptcy, in which case the question arises whether these owners meet the “engaged in commercial or business activities” prerequisite. Some courts have taken an expansive view of business activity to include actions taken even after operations have ceased. Examples include the following:
- Actively helping to wind down the affairs of the company
- Dealing with the sale or other disposition of the business’s assets
- Working with the company’s creditors
- Filing tax returns and paying taxes
In one precedential case, the requirement was found to be met simply by the company continuing to defend against a lawsuit that was pending as of the Subchapter V filing date.
It is clear that in deciding whether a shuttered business is eligible for Subchapter V relief, a bankruptcy court will look at the totality of the circumstances. Any activity connected with the business is likely to suffice unless fraud or misrepresentation is suspected. A qualified Subchapter V attorney can determine whether your closed business can qualify.
The Law Offices of Michael Jay Berger in Beverly Hills is a leader in Chapter 11 practice throughout California. To discuss your debt relief options, contact us online or call 310-271-6223 to schedule a free initial consultation.