Our Mesa Bankruptcy Attorneys Explain Which Chapter Of Bankruptcy Is Right For Small Business Owners
It seems like every day since the onset of the coronavirus pandemic, a major company has declared Chapter 11 bankruptcy due to struggles exacerbated by quarantine and social isolation measures. While Chapter 11 might be the best option for juggernauts like JC Penney and 24 Hour Fitness, small business owners may be better served by other chapters of bankruptcy.
Chapter 7 Bankruptcy In Arizona
Chapter 7 is typically the most affordable chapter of bankruptcy to file, both for small businesses and individuals. Chapter 7 can be used by businesses organized as partnerships, limited liability companies, corporations, and sole proprietorships that meet certain income requirements. When the Chapter 7 petition is filed, a bankruptcy trustee will be appointed to the case. All of the business assets will be sold and these funds will be distributed amongst the company’s creditors. This means that when a company files Chapter 7, it will be required to shut down for good. Small business owners whose companies have relatively low start up costs may choose to just open a new similar business under a different name.
Chapter 13 Bankruptcy In Arizona
Chapter 13 is the option used least often by business owners. Technically only individuals can file Chapter 13, so only sole proprietorships are eligible to file. Combining both personal and business debts, the owner of the sole proprietorship must have $419,275 or less in unsecured debts, and $1,257,850 or less in secured debts. Common examples of unsecured debts are credit cards, medical bills, and personal loans. Secured debts have an asset of yours attached, such as a mortgaged home or financed vehicle. Debts are reorganized into a payment plan that will last either 3 or 5 years, and the business will be allowed to continue operating in the meantime.
Chapter 11 Bankruptcy
In a standard Chapter 11 bankruptcy, a company’s top creditors join together to form a committee when the company files its bankruptcy petition. That committee will have authority over major business decisions, but the company can continue day-to-day operations as usual. The benefit of continued operations is available to partnerships, limited liability companies, and operations. This is the only bankruptcy option that allows a company to remain in business if its debts are too high for a Chapter 13.
Debts are restructured in a Chapter 11, which means there are unique options for emerging from bankruptcy that aren’t available in Chapter 7 or Chapter 13. The business may offer committee members stock and ownership options to replace debts. The business may close some locations and sell some assets without being required to shut down entirely and sell all of its assets. The company may find new financing to assist it through the process. This list is not exhaustive, and the committee can also propose plans for the company to emerge from the bankruptcy.
Small Business Chapter 11
The downside to filing Chapter 11 bankruptcy is that it is difficult, expensive, confusing, and time consuming. Businesses with less than $2,725,625 in debt may be eligible for the small business provisions of Chapter 11 bankruptcy. One of the biggest benefits of the small business provisions is that creditor committees aren’t required for small businesses. This will save the company a lot of money in legal costs. The exclusivity period for a plan, or how long the court will hold off litigation on competing plan proposals, will be extended from 120 days from the date of filing to 180 days. The court may also excuse the company from filing a disclosure statement, which will save the company time and money.
The disadvantages are that unlike standard Chapter 11 cases, small businesses have a deadline of 300 days after the date of filing to propose a plan. The court will only extend the deadline if the company can prove it will be able to do so in a reasonable amount of time. There will also be additional filing requirements, reporting duties, and monitoring by the assigned bankruptcy trustee.
When Is Chapter 7 Better?
While the better option can always vary based on personal circumstances, Chapter 7 is in general a better option when:
- The business is primarily skill or personality based. If you don’t need to go rent new facilities, buy new equipment, and make more products to get running again, you will have an easier time simply opening a similar business under a new name.
- The business simply doesn’t have a future. One of the big name restaurants to file bankruptcy during the pandemic has been Sweet Tomatoes, but unlike most of them, it has filed under Chapter 7. The chain was already struggling with debts before the pandemic hit, with most states restricting restaurants to serving only delivery, take out, or drive through. The company saw no reason to continue to struggle as restaurants reopen, as operation will be extremely difficult under new social distancing and sanitation guidelines.
- There is too much debt to restructure. Your business may simply have no chips left to bargain, and there is no way to restructure your debts with your creditors.
When Is Chapter 11 Better?
- The company had a promising future. Sometimes, unexpected events can derail a viable company to the point of bankruptcy. The coronavirus pandemic is the perfect example of this.
- The business has significant assets that would be difficult to replace. The company may choose to sell some of its inventory and property as part of the bankruptcy plan, but it isn’t mandatory like in Chapter 7.
- There is a strong value in the company’s name and brand. If reopening under a new name would significantly damage the business, Chapter 11 allows the company to keep its name.
Filing Bankruptcy In Arizona
If you are considering filing bankruptcy for your small business, call our offices to schedule a free consultation. Our seasoned bankruptcy attorneys will guide you towards which option is best for you, and provide you with a competitive quote for legal representation if interested. Contact us to schedule your risk-free consultation today.
Bankruptcy Lawyers Mesa