KEL Attorneys on Bankruptcy – Can Your Business Be Saved?
Many small businesses, have, or are considering, simply throwing in the towel. There’s an alternative to closing the doors. When we hear the word “bankruptcy,” the immediate picture that comes to mind is that of a Chapter 7 liquidation which ends the business. If the business has a chance of survival, Chapters 11 or 13 may be more appropriate to save the business.
When large corporations suffer financial losses, Chapter 11 provides a method of restructuring your debt allowing you to stay in business. However you don’t have to be General Motors or Tampa Electric to file Chapter 11. Small businesses, corporations, partnerships, sole proprietorship and individual professionals may file Chapter 11, remain in business and avoid liquidation. There are provisions in the law for a “Small Business Chapter 11,” to speed the process and make it less expensive.
A Chapter 11 is based on a new business plan that you formulate. Under Chapter 11, the debtor may seek an adjustment of debts by reducing the debt, extending the time for repayment or seek a reorganization. There’s no debt limit in a Chapter 11. The only requirement is that there is some hope of reorganization.
Chapter 13 is also a debt repayment plan. In contrast to a Chapter 11 plan, a Chapter 13 plan is simple and more structured. Chapter 13 eligibility is limited by a debt ceiling but many small businesses qualify (if not, Chapter 11 may be appropriate). Most people think only an individual can file a Chapter 13. While partnerships and corporations cannot file a Chapter 13, sole proprietorships or individual professionals may be eligible for relief under Chapter 13.
One important advantage of Chapter 13 is that the plan can include a home mortgage and provide individual debtors with an opportunity to save their homes from foreclosure. Chapter 13 plans allow time to catch up on past due payments to the 1st mortgagor, and in some cases, lien strip a junior trust deed. A “lien strip” can treat a junior lien on real property as unsecured for purposes of the Chapter 13 plan. In some cases, when the plan is completed and a discharge is entered, the junior lien is completely extinguished.
If reorganization isn’t possible, Chapter 7 can provide relief and protection for business’s owners. To qualify for Chapter 7 relief, the debtor may be an individual, a partnership, a corporation or other business entity. Under Chapter 7, there’s no limit to the amount of debt and no consideration of whether the debtor is solvent or insolvent.
In 2005, Congress passed legislation making qualification for Chapter 7 more difficult by requiring the use of a “Means Test” which uses gross income as a limiting factor. Fortunately, if your debt is primarily business debt, the income limits may not apply.
Bankruptcy law for 2010 is more complicated now, however with skilled counsel guiding you and your business can survive this unprecedented downturn. While successful Chapter 7 and 13 bankruptcies require modest experience, a successful Chapter 11 filing is complicated and nearly impossible without years of experience. In the end though there is help for a struggling businesses.