Should I File for Bankruptcy?
Should I File for Bankruptcy?
On June 18, the New York Times warned that what it called a “wave of small business bankruptcies” could be expected over the next six months. It referenced a poll by the U.S. Chamber of Commerce, which predicted that over 40% of the small businesses across the nation could close permanently due to the devastating impact of the pandemic.
If your small New York business has lost customers (and therefore income) due to COVID-19, the question of bankruptcy has likely crossed your mind. Should you file?
In this blog, the bankruptcy team at Gershburg Law, P.C. will go over the various bankruptcy options for business owners. The right solution will depend on how your company is structured, how much you owe, and whether you want to stay in business or move on to the next opportunity in your life.
If it doesn’t make sense to stay in business (the industry has changed too much or you no longer want to run the company), Chapter 7 may be the best option. If you are a sole proprietor, you and your business are essentially the same entity, so you can discharge company debt by filing in your own name. You won’t even have to pass the Chapter 7 means test if most of the debt was incurred by the company. Essentially, if 51% or more of your debt is business debt (that could a be a credit card in your own name), then you’re not required to pass the Means Test. Also, if you own an investment property now underwater, that may also allow you to pass the Means Test and qualify. It’s sometimes complicated, but we can help.
If the business is not a sole proprietorship, filing for Chapter 7 can still be done, but the process is more complicated.
- Partnerships: While a partnership can seek bankruptcy protection, there is no discharge of its business debt and exemptions cannot be used to protect assets. In addition, the trustee can go after each partner’s personal property if the business assets aren’t sufficient to satisfy all creditor claims. Each partner is better off filing in their own names to discharge both personal and business obligations.
- Corporations: Like partnerships, corporations can file Chapter 7, but they can’t receive a discharge, and shareholders who guaranteed or co-signed a company debt will be liable for it unless they file for bankruptcy in their own names. Essentially, if you’ve personally guaranteed something, you’re likely on the hook
- LLCs: A Chapter 7 filing for LLCs works the same way it does for corporations: the business itself can’t get a discharge and any owner who guarantees its debts will have to file personal bankruptcy to get a fresh start. The same rules apply for personal guarantees as well.
If your business is a larger one and you want to keep it going, Chapter 11 allows you to restructure some of its debts and eliminate others. If you manage to put together a business plan that can result in a positive post-bankruptcy balance sheet, even in today’s challenging business climate, a restructuring bankruptcy may be an option.
During a Chapter 11 proceeding, the court will help you restructure the company’s obligations and debts. Most times, you will be allowed to stay in business. General Motors and United Airlines are two examples of businesses that filed for Chapter 11 to deal with debt while continuing to serve customers.
Subchapter V- the Small Business Restructuring Act
This bankruptcy law took effect last February. Before it was passed, any small business that was struggling financially could only restructure its debt by filing Chapter 11. The problem was that Chapter 11 is a lengthy, complicated, and expensive process that is more appropriate for larger companies.
The Small Business Restructuring Act, also known as Subchapter V of Chapter 11, allows companies with less than $7.5 million worth of debt to restructure more easily. The owner can continue running the business and the court can enforce the restructuring plan even if the company’s creditors object to it.
In general, small businesses cannot file for Chapter 13, but there is an exception for sole proprietors as, unlike corporations and LLCs, they are legally indistinguishable from their companies. You can file under your own name and seek relief from both your personal and business debts.
With a Chapter 13 filing, you are not subjected to an income-based means test, and you keep your personal assets in exchange for repaying some or all of your debts in a three-to-five-year repayment plan. As long as your payments are maintained, you won’t lose anything.
Do you have more questions about small business bankruptcy in NY?
You worked hard to grow your business, but the pandemic has left you in difficult shape financially. At Gershburg Law, P.C., we can help you resolve your debt problems while eliminating your personal liability. If you decide that bankruptcy is the best option, we will provide you with the expert legal representation you need to obtain debt relief. For more information or to schedule a free consultation, call 866-554-8082 or contact us online.