Posted by Kevin on March 3, 2018 under Bankruptcy Blog | 
Under State law, a business entity, such as a corporation or an LLC, is considered a person and is separate from its shareholders (in the case of corporations) or members (in the case of LLC’s). If a corporation or LLC fails, it will probably have to deal with creditors who may sue the business, obtain judgments and levy on the business assets. This can be a long, drawn out procedure. As an alternative, that failed business entity may file bankruptcy. The entity will be the debtor. If the plan is to shut down the business and walk away (as opposed to a restructuring and continuation of business), then Chapter 7 can be a useful vehicle. Upon the filing, the automatic stay goes into effect as to the business entity. A trustee is appointed who literally changes the locks on the door, deals with the landlord and other creditors, assembles and liquidates the assets, and pays off the creditors.
How does a business chapter differ from a personal Chapter 7? In a personal Chapter 7, the debtor gets a discharge of many debts, and is allowed to keep a certain amount of property which is exempt. The discharge and keeping a baseline of property is part of the concept of giving the debtor a fresh start.
However, there are no exemptions for the business in Chapter 7. The trustee sells everything. I could understand that concept because if you are going out of business, you do not need assets for a fresh start. However, in Chapter 7, the business entity does not get a discharge. I always thought that was strange and looked at the legislative history behind this rule. The legislative history stated that discharges are not given to corporations (there were no LLC’s back then) so that people could not traffic in corporate shells??? My initial thought was, it only costs a few hundred dollars to set up a new corporation with no debt. So, why traffic in corporate shells? More history. It was only about 100 years ago that state legislatures passed business corporation statutes like the one’s we have today. Before that, if you wanted to incorporate, you would have to get your local State representative to sponsor a bill to establish your corporation. The legislature actually voted on it. It was an expensive and time consuming activity. Not surprisingly, there were not that many corporations. So, back in the day (as my kids would say) discharging debt within a corporation through bankruptcy could conceivably lead to a lucrative side deal if you were allowed to sell the debt free entity to a third party.
The bottom line is that business entities can file under Chapter 7. However, business Chapter 7’s tend to be more complicated because assets are involved, and the Trustee is usually more involved than in personal Chapter 7’s. If you are the owner of a failing business, it may be a good idea to consult with an experienced bankruptcy attorney.
Posted by Kevin on April 17, 2017 under Bankruptcy Blog |
If your business needs bankruptcy relief, you have to start with basic questions about how your business was set up and its debt amount.
Sole Proprietorship
The most straightforward business bankruptcies tend to be those in which the business is a sole proprietorship. Your business is operated through you under your name or under an assumed business name (“doing business as” or “DBA”). So, for purposes of bankruptcy, if you operate a sole proprietorship, you file bankruptcy in your name and it will include your personal assets and liabilities and the assets and liabilities of the business.
Other Forms of Business
Basically, this includes corporations, partnerships and LLC’s (limited liability companies). In these cases, the business entity is the debtor. If the owner of the business is liable under guaranties, the owner might also need to file an individual bankruptcy.
Purpose of Bankruptcy
Once you have established what type of business entity is involved, the basic question is whether you want to utilize bankruptcy as a tool to continue in business or as a tool to liquidate and shut down the business.
The General Guidance
Beyond these initial points, here are some basic rules. They will help you be a bit more prepared when you come to meet with an attorney.
1. A corporation, or LLC, or partnership cannot file a Chapter 13 “adjustment of debts.” Only an “individual” can. So, if you operate a sole proprietorship, you and the business may be eligible for a Chapter 13 filing.
2. Chapter 13s are sometimes mislabeled “wage-earner plans,” but any source of “regular income” is allowed.” The requirement is simply “income sufficiently stable and regular to… make payments under a plan under Chapter 13.” So if your business income—combined with any other income—is even somewhat stable, you would likely qualify under this “regular income” requirement.
3. But you and your sole proprietorship CAN’T file a Chapter 13 case if your total unsecured debt is $394,725 or more, or if your total secured debt is $1,184,200 or more. (Note: these limits are adjusted for inflation every three years.) While these may seem like relatively high maximums, be aware that they include BOTH personal and business debts (since you are personally liable for all the debts of a sole proprietorship). Also, the amount of unsecured debt can include that portion of your mortgages and other secured debts in excess of the value of the collateral. So a $750,000 debt secured by real estate now worth $550,000 adds $200,000 to the unsecured debt total. In addition, if you want to file a Chapter 13 as an individual and you are the owner of a corporation, you may have to consider as your unsecured debts those debts of the corporation which you personally guaranteed.
4. If your debt totals are above one of the above debt limits, you can still file a Chapter 7 “straight bankruptcy” case for the business, but that means, for all intents and purposes, the business will shut down. Chapter 7 tends to be a better option for cleaning up after a closed business, whatever its legal form.
5. A corporation or LLC does not receive a discharge in a Chapter 7.
6. If your debt totals are above one of the Chapter 13 debt limits and you are trying to save the business, one option is a Chapter 11 “business reorganization.” for the corporation, LLC, or partnership. The disadvantages of Chapter 11 are that it is a hugely more complicated than Chapter 13 which translates into substantially higher legal, filing and Trustee fees, and the financial reporting requirements are more onerous. Bankruptcy courts have tried to address these shortcomings with streamlined “small business” Chapter 11s, but they are still often prohibitively expensive.
7. If you do end up filing a personal Chapter 7 case when owing substantial business debt, you may have the advantage of being exempt from qualifying under the “means test” (a test based on your income and allowed expenses) if your business debts are more than half of your total debts.
If you are trying to save your financially struggling business, it is crucial to get competent business bankruptcy advice, and to do so just as soon as possible. You have no doubt been working extremely hard trying to keep your business alive. You will need a solid game plan for using the bankruptcy and other laws to your advantage.
Posted by Kevin on October 1, 2014 under Bankruptcy Blog |
There are pros and cons to the above statement. That is why we say “Can Help” as opposed to “Will Help”
What happens when a small business goes under. It usually means that not enough money is coming in to pay bills and employees (much less the owner). This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money. Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.
Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you. You have to deal with vendors and suppliers, advertisers, workers, customers, etc. You may have physical plant which will be subject to foreclosure or tenancy action. You may have product that needs to be liquidated. You may need to go after accounts receivable. That is a lot of work, and your inclination is to put everything behind you and move on.
If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7. For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy. However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful. The automatic stay will stop the lawsuits. The trustee will be responsible for the liquidation. This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit of Creditors.)
On the other hand, if the corporation or LLC is service oriented as with few assets, bankruptcy may be an unnecessary expense.
Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits. If the principal guaranteed the obligation, then he is SOL. Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil. This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment. This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7. This decision, however, would have to be made on a case by case basis.
If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner. d/b/a’s can fail for the same reasons that close corporations or LLC’s fail. But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7. Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge. Of course, the bankruptcy will include both the business assets and the personal assets. Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors. The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.
If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.
In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.
