Weighing Chapter 11 and Chapter 13 as Bankruptcy Options for Small Business Owners
A small business depends on its goodwill and name recognition, which are viable assets only if the business stays in operation. If your company is having financial difficulty but could turn the corner to profitability with some help, restructuring your debt through bankruptcy could be your best option. Depending on your circumstances, a Chapter 11 or Chapter 13 reorganization may be advisable.
A successful Chapter 11 or Chapter 13 bankruptcy allows you to reduce and repay your business debts over time while you:
- Continue to run your company
- Retain property needed to maintain operations
- Obtain additional lines of credit
- Modify payment terms on mortgages, equipment loans and other secured debts
The choice of which chapter to use will depend on your company’s type of organization and the size of its debt.
Chapter 13 bankruptcy is available to business owners who operate as sole proprietorships. Businesses organized as corporations, LLC or other entities are not eligible. To file for Chapter 13, your unsecured debts must be $419,275 or less and your secured debts must be $1,257,850 or less.
Because you are filing as an individual, your Chapter 13 case will proceed in the same way as it would for a wage earner. You establish a three- to five-year plan that calls for partial repayment of unsecured debts. Your secured debts, like mortgages, remain in effect but may be renegotiated. You can continue to operate your business during the plan period. At the end of the plan, any remaining unsecured debt is discharged.
Chapter 11 reorganization is available to business organizations of any type but is generally too expensive and complex for small businesses to use to their benefit. However, there is a streamlined Chapter 11 procedure known as Subchapter V for companies with secured and unsecured debt of $7.5 million or less. At least half of that amount must be business debt — not the personal debt of the owner.
Subchapter V eliminates many of Chapter 11’s procedural and reporting requirements. Although a bankruptcy trustee is appointed, he or she plays a hands-off role and you retain control as the business owner. You can set up a plan that allows you to pay off a portion of the business’s debt within three to five years, similar to a Chapter 13 plan. There is usually no creditors committee appointed and a court can approve the plan even if every creditor raises objections. In addition, you can pay for administrative and court expenses as part of the plan rather than in one lump sum up front.
At The Law Offices of Michael Jay Berger, based in Beverly Hills, I have decades of experience helping struggling small business owners get things back on track financially. I can help you pursue the best option for your business situation. Please call 310-271-6223 or contact me online to arrange a free initial consultation.