San Diego Business Bankruptcy Attorney
Should I File For Bankruptcy or Shut the Business Down? or maybe both?
Filing for business bankruptcy of any kind is an extremely serious step. For that reason, you, and if necessary the company’s officers and directors should weigh all relevant factors before you decide to attempt to save your business by filing for Chapter 11 protection, or begin the process of shutting it down by filing a Chapter 7. Here are a few thoughts, but hardly an exhaustive list, on when to consider each option.
I Thought Chapter 11 was Just For Auto Makers and Airlines!
Not so. Ch. 11 is used for smaller businesses and even for individuals who have more debt than can be administered in a Ch. 13! In general, businesses file for Chapter 11 because they have solid reasons to believe the company can recover and eventually become a profit-making entity once again. There may have been a temporary setback. A strike, a spike in interest rates for a rate-sensitive enterprise, etc. Or, for example, if the company is launching a new product that has a good chance of capturing a great deal of new business for your company, you may want to go with a debt reorganization plan, i.e. Ch. 11. This effectively buys you time to stay in operation while you launch and promote the product.
A Chapter 7 for business? Isn’t that for struggling individuals?
Not necessarily. The reasons for filing a small business bankruptcy as a Chapter 7 are many and varied. During – and in the aftermath of – the Great Recession of 2008, many business owners found their sales volumes shrunk dramatically. For some, their product line is well on the way to being obsolete, or their particular market is congested with products that the company cannot compete with. Those are among the indicators it may be time to shut the company down. Filing Chapter 7 will allow you to settle things with your creditors, and move one step closer to closing the company. While regrettable, this approach does prevent you from losing more money than you already have lost, and also allows your creditors to focus their energies on other matters.
Does a Chapter 7 Small Business Bankruptcy Work in the Same Way As It Does For An Individual?
Not exactly. A Chapter 7 bankruptcy filing for a business entity is defined as a “liquidation” bankruptcy. That means the company’s assets are valued and if it’s cost effective to sell them to pay the company’s debts, they are indeed sold and the creditors get something. The most common dilemma for owners of smaller businesses – those businesses with a principal owner and a handful of employees, generating revenue in the hundreds of thousands up to several million dollars per year – is deciding whether to pursue a personal bankruptcy, a small business bankruptcy or both. Let me explain. For newer and smaller businesses, creditors nearly always require the principal (i.e. owner/operator who is also usually president and CEO of the small corporation) to personally guarantee the credit taken out by the company. For example, XYZ Painting, Inc. wants to establish a line of credit with a large painting supply company. John Jones, owner, is required to sign the credit application and promise that if XYZ doesn’t pay up, John Jones will. If the owner is struggling personally too, it may make more sense to file a personal Ch. 7, claim some of the assets of the corporation as belonging to the owner (after all, he / she is also usually the sole shareholder) and protect them as exempt. Then, the owner can dissolve the business and reopen under a different name. While this may sound a bit convoluted, for this owner convoluted is what works best.
How Can I Insulate Myself From the Company’s Debts?
Sometimes the owner can’t separate him/herself from the company’s debts. When the owner of the company has personally guaranteed its debts, we have to look at how each is situated. If the owner has prospered personally and accumulated property that can’t be protected and preserved to him / her in personal bankruptcy, it’s much messier to segregate the two. When the company’s credit is its own, though, a Ch. 7 small business bankruptcy may be a smart solution. Creditors get a notice that the company has filed; the trustee examines the assets and determines what to sell (usually everything of significant value) and the creditors go away assuming that’s all they can get. The seldom-published fact is that a corporation doesn’t get a “discharge” like an individual gets in a Ch. 7. But the net effect seems to be the same: the creditors stop looking to the company for payment. After all, the assets are liquidated. The alternative is for the owner to file a personal bankruptcy, cutting off his / her personal guarantee of the company’s debt.
When making a decision about whether to file for bankruptcy or shut the company down, don’t rely just on your own hopes and perceptions. Seek the input of experts who do not have a vested interest in your company one way or the other. Often outsiders can provide data and a sense of perspective that is difficult for you to achieve. It sounds counter-intuitive to spend money on experts when you’re struggling financially already. Think of it this way: the company will end up paying for expert information either before or after the bankruptcy is filed. Believe me, the Ch. 7 (or, for that matter, Ch. 11) trustee isn’t going to spend his / her own money on this part of the process. Only when you have weighed all the available information should you make your final decision.
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