Expert Bankruptcy Attorneys Explain The Bankruptcy Protection Options Available For Small Business Owners

From a financial standpoint, small business owners have been one of the groups hit the hardest by the coronavirus pandemic. Millions of Americans lost their jobs and no longer have disposable income to spend on nonessential goods and services. This impacted many people in Mesa, Arizona as well as the East Valley.

State lockdowns shuttered gyms, restaurants, and other businesses for months. No matter the type of business you own, you may be considering filing bankruptcy due to losses from 2020 and 2021 so far. If you are considering filing for bankruptcy protection in Arizona, there are options available to you.

You should have a full understanding of the chapters of bankruptcy available as options to you.

Small Business Owner Filing For Bankruptcy In Arizona

Chapter 7 Bankruptcy (Partnerships, Limited Liability Companies, Corporations, Sole Proprietors)

Chapter 7 Bankruptcy is the most popular type of bankruptcy due to the large number of consumers who file each year. You can file a personal bankruptcy as a sole proprietor, or as the business for partnerships, limited liability companies, and corporations. Chapter 7 bankruptcy typically takes 4-6 months from filing to discharge, and discharges most unsecured debts without any repayment. Because of how attractive it can be to discharge all debts in a relatively short time frame, Chapter 7 is only available to businesses and individuals that meet certain criteria, including income restrictions.

Chapter 7 is a liquidation bankruptcy. Not only are debts liquidated, but the business itself as well. A business that discharges its debts through Chapter 7 bankruptcy must shut its doors for good. A business owner who wishes to continue operating despite recent financial setbacks must file under another chapter or find a different debt relief option. However, the business owner may also open a new business under a similar name. This is more feasible for certain types of businesses than others.

Chapter 13 Bankruptcy (Sole Proprietors)

Chapter 13 bankruptcy is generally only available to individuals, so sole proprietors are the only type of business owners who can file this chapter of bankruptcy. Chapter 13 is an option for sole proprietors with debt whose income is too high to qualify for Chapter 7, or who wish to continue running their business. Chapter 13 also allows the filer to retain valuable assets that aren’t protected by exemptions in Chapter 7.

In a Chapter 13 bankruptcy, debts are reorganized into a payment plan that lasts either 3 or 5 years. Those who make less than the state median income for their family size will have a 3 year plan, and those who make more will have a 5 year plan. The plan will first pay off fees to the bankruptcy trustee and attorney. Then, secured debts will be paid. Third, the plan will pay off priority debts. The fourth category to be paid is unsecured, nonpriority debts. The payment plan is based on the filer’s disposable monthly income, so the fourth category of debts may be discharged without full repayment if the filer doesn’t have sufficient disposable monthly income.

One benefit of using Chapter 13 as a sole proprietor is that you can keep secured assets that aren’t protected by exemptions. However, Chapter 13 has debt limits, which can disqualify many business owners. The limit for unsecured debts is $419,275, and the limit for secured debts is $1,257,850. Business owners whose debts exceed these limits will either need to qualify and go out of business through Chapter 7, or file Chapter 11 instead.

Chapter 11 Bankruptcy (Partnerships, Limited Liability Companies, Corporations, Sole Proprietors)

Chapter 11 bankruptcy helps individuals and businesses restructure their debts. This chapter is typically complex, and expensive due to that complexity, and therefore more often used by large businesses with substantial debts and assets. However, it does offer the benefit of allowing the business to remain in operation. When you hear about a big company filing bankruptcy in the news, this is probably the chapter they filed. The NRA, JC Penney, J. Crew, and Chuck E. Cheese are all major organizations that have recently declared Chapter 11 bankruptcy.

In a standard Chapter 11 bankruptcy, the business or individual’s top creditors form a committee. This committee has authority over major financial business decisions, but the business can keep running under ordinary management. The business, with the assistance of its bankruptcy attorneys and other professional advisors, will propose a plan to restructure its debts. The committee will vote to approve or reject this proposal. The committee can also draft its own bankruptcy plan, if it disapproves of the company’s proposal. Once everyone has come to an agreement, the business can move forward with the plan to emerge from debt. Some common ways businesses do this in Chapter 11 are converting debt into shares for creditors, selling the business, downsizing the business, and finding new funding sources. The business (or individual) is protected from creditor collection while the bankruptcy is active by the Automatic Stay.

As you may have inferred, filing Chapter 11 can be enormously expensive. Chapter 11 is far more complex than Chapter 7 and Chapter 13, which results in additional costs. Attorney’s fees are higher, and the business may need to hire additional consultants (tax, investing, etc.) to assist in the process. That’s why Chapter 11, Subdivision V was created.

Subdivision V is a special type of Chapter 11 for small businesses. The debt limit of $2,725,625 was raised to $7,500,000 to address the coronavirus pandemic until at least March 26, 2021. This subdivision eliminates the creditor committee, which greatly reduces the complexity and cost of Chapter 11.

Contact An Experienced Bankruptcy Law Office In Mesa, AZ

Do you have more questions about filing bankruptcy as a small business owner? You probably should- bankruptcy is complicated enough as it is, and owning a business can complicate your case further. This means you need the counsel and guidance of an experienced business bankruptcy lawyer. Your free initial consultation is your opportunity to ask all of your questions regarding bankruptcy, and find out which chapters you are qualified to file. Our Mesa bankruptcy law office understands that your budget is probably tight if you are considering bankruptcy, so not only is your initial consultation free- you may be able to file bankruptcy in Arizona for as little as $0 down! Contact us in Arizona today to take the first step towards a fresh start at (480) 800-0033.


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Bankruptcy Lawyers Mesa

4856 E Baseline Rd #104
Mesa, AZ 85206

Phone: (480) 800-0033