B is for Business in the ABCs of Bankruptcy

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B is for Business in the ABCs of Bankruptcy

It is not uncommon that potential clients call to request a free consultation for a “Business Bankruptcy.”  Our response is always to try to bring someone in so they can sit down with an attorney and discuss how businesses and bankruptcies intercept.  This is because “business bankruptcy” does not exist — there is no separate bankruptcy just for businesses!  Different types of bankruptcies are available and the best type to choose is determined by the structure of the entity and the goal of filing.  So, let’s break it down:

Is your business registered with the state?

A person can run a business without there being a corporation.   For example, someone who sells MaryKay, someone who mows lawns and someone who consults are all types of businesses that might not be a corporation.  In these cases, there is no separation between the person and the business, so the business’s assets, liabilities, income and expenses are inseparable from the person’s.  This sort of business can file any type of bankruptcy that a person can file, so a Chapter 7, Chapter 11 or Chapter 13.

Depending on the type of business, and whether the person wants to continue the business, a Chapter 7 may be the best answer.  For example, if the business is personal services (teaching piano, for example), then it likely has no real assets and is easy to close and reopen.  In this case, filing a Chapter 7 would allow all of the debt to be discharged and once the bankruptcy is complete, the business can start anew.  However, if the business were something like a landscaping company and there was substantial equipment and assets involved, along with some sort of reputation, a Chapter 13 or Chapter 11 may be preferred as a way to continue operating without concerns of the assets (or business itself) being sold by a Chapter 7 Trustee.

When your business exists in this manner, when you file the bankruptcy, it will not just be your business filing — you will file as well because you and the business are the same thing.

Is the business a Corporation or Partnership?

Businesses of all sorts find themselves needing bankruptcy

One notable business bankruptcy was filed by Chapter 11 Books, which filed a Chapter 11 bankruptcy to reorganize.

A Chapter 13 CANNOT be filed by a corporation or partnership, but Chapter 7 and Chapter 11 can.  Chapter 7 is for a business that is no longer going to operate. A Chapter 11 is for businesses that are going to reorganize and continue operating.

If the business is going to close, it may not even be necessary to file a Chapter 7, except in a few circumstances:  1) if there are assets to liquidate so creditors can receive some payments without the corporation’s officers having to worry about liabilities; 2) It tells the creditors, quite clearly, that the corporation is ceasing its operations and exactly what assets are available to be used to repay; and 3) It may shield owners of the corporation from future liability to shareholders and other creditors if the Trustee does not find any malfeasance.  Although unpaid corporate debts are not discharged at the close of a Chapter 7, the corporation must stop operating after the Chapter 7 and eliminates any reason for creditors to sue a corporation after the business files.

If you own a business and are thinking about bankruptcy, consider whether your business would have value if it were sold, if the business has assets that could be sold, if the business could operate without you and whether your debts are primarily related to your business.  Bankruptcy is overwhelming and can be even more so if a business is involved — talking to an attorney can help relieve pressure and provide clarity on how best to proceed.