Does Bankruptcy Really Mean the End of Your Business?

Is there a way to set your finances straight through bankruptcy while keeping your business functioning? If you are trying to save your business from going under, there are a few options available to you when declaring bankruptcy. Depending upon which chapter you file under, you may be able to keep some or potentially all of your business. 

We will explore a few ways you may be able to keep your business running while undergoing bankruptcy.

What is Your Relationship to the Business?

Your relationship with your business will determine the best path forward for preserving it. Does your business operate under an L.L.C.? Are you a sole proprietor or a partner? There are different chapters of bankruptcy that are designed to benefit various types of debtors. 

Let us first look at the different bankruptcy chapters available to you as a business owner.

Chapter 7

This type of bankruptcy involves a court-appointed trustee who manages your debit by selling off your assets and paying creditors. If your business is structured as a sole proprietorship, then it is possible to file for chapter 7 bankruptcy as an individual. Your business would be one of several assets that the trustee could potentially try to sell; however, you can list exemptions that protect your business assets at the expense of other assets such as personal property.

If you are the owner of an L.L.C. or a corporation, you must file in the business’s name, which means the business’ assets, not your personal assets, are sold off to repay its debts. This effectively dissolves the company. Therefore, your relationship to the business determines whether chapter 7 is the right choice. You can claim chapter 7 as an individual and have your sole proprietorship exempted from the trustee. However, this is not possible for other business structures. 

Chapter 13

Chapter 13 bankruptcy allows for individuals to repay creditors through a payment plan devised through bankruptcy court. For the same reason listed for chapter 7, business owners who operate their business as a sole proprietorship are able to file as an individual. This allows them to restructure their own debts, treating the sole proprietorship as one of many assets owned by the individual.

This type of bankruptcy is more challenging to file under successfully. This is because limits are placed on the amount of debt an individual can hold while still being eligible.

But what if your business is an L.L.C. or corporation? Don’t stress just yet – there is another chapter of bankruptcy that will allow you to save L.L.C.s and corporations.

Chapter 11

When you hear of large corporations like airlines or telecommunication companies filing for bankruptcy, it is usually under chapter 11. Chapter 11 bankruptcy is the only chapter that businesses can file under and still remain operational. Like chapter 13, this allows the filer to restructure their debts. Usually, this means selling off some of the business’s assets to help them make regular payments, but larger corporations can generally handle the loss of certain assets.

Small Businesses and Chapter 11

There are some special provisions explicitly made for small business debtors who file under chapter 11. Though the overall process is similar for small businesses and larger corporations, small business debtors can expedite the process and save on particular legal and judicial fees. 

Because of the relative leniency of some of the provisions, small business debtors can expect stricter guidelines throughout the bankruptcy process. Due to the coronavirus pandemic, the debt ceiling required to file as a small business debtor has been raised from $2,725,625 to $7,500,000 and was recently renewed till March 2022.

It Is Possible to File for Bankruptcy and Keep Your Business

Now that you know that it is possible, your next move should be to consult with a bankruptcy lawyer. Together, you can go over your debts and business structure to determine which chapter would be best for your business and your financial interests. 


About the Author
Veronica Baxter is a legal assistant, writer, and avid blogger working out of Philadelphia, PA. She writes for the Law Offices of David M. Offen, a successful bankruptcy lawyer in Philadelphia.