Understanding Small Business Bankruptcy Options
Running a small business is hard and it is usually necessary to take on debt, especially early on. If that debt gets out of control, the business and its owner can get into serious financial difficulties. Fortunately, US bankruptcy laws offer business owners some solutions.
Here are the basics:
Asset liquidation is a key component of Chapter 7 bankruptcy; however, sole proprietors of businesses can file for personal bankruptcy, which includes a list of property that creditors cannot sell. If the non-exempt assets cover all the business debts, the business can continue operations.
When a small business closes, its owners are often left with personal debt incurred in the process of furthering the business. Without business income, repaying this debt can be impossible. In this situation, personal bankruptcy can help.
For larger businesses, filing for Chapter 11 bankruptcy could be the right choice. Chapter 11 bankruptcy is an expensive procedure that involves court-approved reorganization. This includes debt restructuring and some asset sales, but the business remaining open is key to this form of bankruptcy.
Subchapter 5 of Chapter 11
Subchapter 5 of Chapter 11 is part of the Small Business Reorganization Act (SBRA). It helps businesses with less than $2,725,625 of debt restructure less expensively than with a traditional Chapter 11. The CARES Act has raised that limit to $7.5 million to help the many small businesses hit by COVID-19.
Chapter 12 bankruptcy is for family farmers or fishermen. Under Chapter 12, debts are repaid over three to five years. Chapter 12 is cheaper to implement than Chapter 11 and accounts for irregular income that makes these businesses unsuitable for Chapter 13 bankruptcy.
Chapter 13 bankruptcy involves reorganization of a business and restructuring of its debt. Sole proprietors of small businesses can avoid liquidating their assets by filing for Chapter 13 bankruptcy.
Under chapter 13, depending on income, debtors repay some or all of their debts over three to five years.
The Bankruptcy Process
Before a bankruptcy case makes it to bankruptcy court, a federal judge needs to approve it. Therefore, it is very important that the small business apply for the appropriate chapter of bankruptcy and gather sufficient supporting evidence for the petition and the bankruptcy case, itself.
Here are some of the main supporting documents that may be required for bankruptcy cases:
- A record of all business assets and liabilities
- Proof of income and expenses
- Current bank statements
- Details of contracts and financial obligations, such as leases
- Details of creditors, amounts owed, and the reasons for the debt
For bankruptcies filed by individuals, the following information will also be necessary:
- Details of personal income
- Details of living expenses
- A list of personal assets
A Tennessee bankruptcy attorney can clarify which bankruptcy works best for your small business, what documents you will need, and where to find other information.
Bankruptcy and Credit
Unfortunately, the credit of sole proprietors of a business that files for bankruptcy will take a big hit. Chapter 13 bankruptcies remain on credit histories for as long as seven years. Chapters 7 and 11 are worse, affecting personal credit for up to a decade.
If a business that operates as an LLC (limited liability company) or a corporation files for Chapter 7 or 11 bankruptcy, personal credit is not affected, except for personally guaranteed debt. In this case, if payments are missed, personal credit will be damaged.
When a business stays open after it files for bankruptcy, some of its credit scores can be damaged.
Here is a breakdown:
While the business’s Dun & Bradstreet PAYDEX score won’t be hurt, the Dun & Bradstreet business credit report might suffer.
The Experian Intelliscore Plus score for a business factors bankruptcies as between five and ten percent of its rating, so filing for one will have a significant impact.
Even business proprietors who file for personal bankruptcy can affect some business credit ratings. For example, FICO’s SBSS score considers the business owner’s credit rating. This can hurt a company’s chances of obtaining financing.
US bankruptcy codes are complex and filing for bankruptcy can be hard without professional guidance. Discussing your situation with a Tennessee bankruptcy attorney is a great first step toward getting on top of your debt problem.
The attorneys at The Pope Firm have many years of experience helping Tennessee businesses through the bankruptcy process. Call 4239297673 today to speak to a representative and learn how we can help you.
The Different Types Of Bankruptcy
Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.
Chapter 13 Bankruptcy
Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.
If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.
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Frequently Asked Questions
Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.
There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.
Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.
Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.
Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.
There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.
What are the Differences Between Chapter 7 and Chapter 13?
The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.
Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.
What Other Types of Bankruptcy Are There?
Two other types of bankruptcy are Chapter 11 and Chapter 12.
Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.
Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.
A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.
Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.
Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.
How bankruptcy affects business depends upon the type of bankruptcy filed.
Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.
During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.
Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.
Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.
When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.
- Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
- Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
- Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
- Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
- Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.
Declaring bankruptcy wipes out many debts, but not all.
What Debts are Usually Covered by Bankruptcy?
Bankruptcy can clear most unsecured debts, including:
- Credit card bills
- Medical bills
- Overdue utility payments
Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.
What Debts Are Not Covered by Bankruptcy?
- Child support
- Alimony obligations
- Those related to personal injury or death in a drunk driving case
- Any debts not listed on your bankruptcy papers
No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.
What Debts May Be Covered?
Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.
Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.