Does your business need to declare bankruptcy?

No surprise US Commercial Bankruptcy Records 2020 is up 33% from the previous year due to the coronavirus pandemic. In September alone, business bankruptcy cases increased by 78% compared to September 2019. There will certainly be more filings as businesses struggle to stay afloat amid the COVID-19 economic downturn. -19 continues.

Declaring bankruptcy is not an easy decision to make. It’s the solution that business owners turn to after exhausting all other options. It was the realization that they had to make a big move to pay off their outstanding debts and close or reorganize their company.

If you’re concerned about the financial stability of your small business and want to know more about the bankruptcy filing process, the types of bankruptcy, and what happens when you go bust, we’ve rounded up the this helpful guide.

What is Corporate Bankruptcy?

Bankruptcy is a legal process for businesses (and individuals) to cancel debts and provide creditors with a way to receive payment from a struggling business. The legal process is outlined in the United States Bankruptcy Code and is handled in federal courts. Business owners try to avoid bankruptcy because it often means the end of the company and results in a black mark on the company’s (and owner’s) credit report.

When Should You File for Business Bankruptcy?

Talk to your company’s accountant to make sure you have all the facts about your financial situation. What do they think about filing for bankruptcy? Your first step as a business owner is to ask yourself, do you want to try and save your business or are you ready to call it a shutdown? If you think you’re having a nightmare and can talk to creditors about delaying payments or create a temporary repayment plan, you can avoid bankruptcy altogether. However, if the amount of debt is overwhelming and you need legal help to clear it, you have several options depending on how you have structured your business.

Types of Bankruptcy

There are three types of bankruptcy (or “chapter”) for small businesses.

1. Chapter 7: Liquidation.

Chapter 7 bankruptcy is a liquidation option for both individuals and businesses. For a business, that means you can’t continue to run the company and have to liquidate the business’s assets to pay off debt. Once a business goes to bankruptcy court, employees are fired and the company shuts down. The court then appoints a trustee to take over and handle the liquidation and payments to the creditors. Possibly, the business has several creditors that require payment. The trustee is responsible for allocating assets and making payments to creditors.

As a sole proprietor, the business’s obligations and assets are not legally separate from the business owner’s personal assets. Thus, the corporation exclusively files for Chapter 7 personal bankruptcy. However, if the majority of your debt comes from the business, you can protect some of your personal assets from liquidation. to pay the debts of the business.

Bankruptcy waivers vary by state, and some allow you to keep essentials like your home, car, or professional equipment. Some waivers protect the entire value of the property, while others only protect part of the value of the property. However, most business assets are not exempt and you will likely lose it to liquidation.

Usually, issuing Chapter 7 takes four to six months from the time you file the paperwork with the court. Once your bankruptcy proceedings are approved, you will receive a bankruptcy “dissolution” notice, which means you are no longer responsible for the debt. All correspondence and inquiries regarding payment will then be directed to the trustee designated for your case.

Although legal entities such as corporations, limited liability companies (LLCs), partnerships, and sole proprietorships are eligible to file for Chapter 7 bankruptcy, only the sole proprietor can be officially fired. Therefore, in some cases, under Chapter 7, creditors can still sue the owners of corporations, LLCs, and partnerships for debt collection.

2. Chapter 13: Reorganization.

Another option for sole proprietors is to file for Chapter 13. Usually used by individuals but not business owners, very small businesses, or sole proprietorships with only a handful of owners. Debtors can also use Chapter 13. Chapter 13 allows sole proprietors to reorder their debts and keep their businesses afloat.

The Bankruptcy Code sets specific debt limits for Chapter 13 and is set every three years. The current amount of debt that can be rearranged in Chapter 13 bankruptcy is $419,275 in unsecured debt and $1,257,850 in secured debt. (Unsecured debt is unsecured debt, and secured debt has specific assets as collateral. Unsecured debt is based on the creditworthiness of the borrower.)

Under Chapter 13, the trustee can access the personal and business assets and debts of the sole proprietor, and personal and business assets can be used to repay the debt. If you choose to file for Chapter 13, you must file a reorganization plan with the court that shows how you plan to repay the debt—usually three to five years.

3. Chapter 11: Reorganization.

Chapter 11 is for any legal entity, sole proprietorship, LLC, corporation, or partnership, that wants to keep running the business while reorganizing its debts. Struggling businesses often follow this process when the situation is not completely hopeless and they are able to continue operating with the assistance of the bankruptcy court.

Unlike Chapter 7, where the company ceases to exist and the trustee controls the assets and liabilities of the business, in Chapter 11 bankruptcy the business owner maintains control and can take decision-making for the company, as long as the court agrees. The goal is to pay off debts within a specified time frame and then exit bankruptcy as a debt-free operating institution.

To qualify for Chapter 11, the business must still generate income. For Chapter 13, you must file a reorganization plan with the court that shows how you plan to repay the debt. Your court and creditors must review and approve your plan. You can set up a repayment plan with creditors without going to bankruptcy court, but it’s likely that creditors will expect payment much sooner. The court may set a repayment term of 20 years or more.

Small Business Reorganization Act

The Law on reorganization of small businesses in 2019 was signed into law to allow small businesses to file for Chapter 11 bankruptcy faster and less expensively. The SBRA, effective February 2020, applies to companies with secured and unsecured debts of less than $2,725,625. Under the SBRA, the business is guaranteed to be a trustee to facilitate the reorganization of the company. The act also eliminates some of the procedural burdens and costs associated with reorganization. In addition, debts are no longer required to be paid in full to maintain ownership of the company. As with any legal proceeding, check with your attorney to see if an SBRA would benefit your reorganization situation.

Consequences of bankruptcy

Even though your credit report goes bankrupt for several years (usually 7-10 years), rebuilding your good credit can begin as soon as discharge. Pay your bills on time — or even multiple times per month — and consider signing up for automatic payments. Also, be sure to check your credit reports regularly for errors.

Disclaimer: This information has been compiled from external sources. Fundbox and its affiliates do not provide financial, legal or accounting advice. This content has been prepared for informational purposes only, is not intended to provide, and should not be relied upon as financial, legal or accounting advice. You should consult your own financial, legal or accounting advisors before entering into any transaction.