After decades of helping individuals and businesses one thing is clear. Each client is unique and that includes their problems, situations, and possible solutions. Experienced lawyers do not offer cookie cutter options. The Bankruptcy laws have parameters, rules and regulations. Within these parameters experienced lawyers should look for solutions that best fit the needs of the individual person or company. Our motto is that you are special and should be treated as such.
Bankruptcy is sometimes a necessary event in the life of a business. When cash is short, creditors start calling or taking other actions to collect. Bankruptcy provides breathing room for an orderly way of paying creditors. Sometimes reorganization is possible. Sometimes the company needs to liquidate. Either way, bankruptcy offers help to the business and its owners.
For any type of case filed, papers must be filled out that show all property owned by the business, all debts owed, and a cash flow schedule. As will be discussed a little later all creditors must be listed so they can participate in the proceedings. Any creditor that is not listed and given the opportunity to participate can later attack the bankruptcy.
Before determining the options for a small business, whether liquidating or reorganizing, the formal ownership of the business has to be determined. Each type of bankruptcy has its own advantages depending on the ownership. The 3 main possibilities are:
- Sole Proprietorship: either individually or a married couple.
- A Partnership
- A Corporation including LLCs and Sub-Chapter 7S. This can include a For Profit corporation or a Not-For-Profit Corporation.
For a business to reorganize, a payment plan has to be approved by a court. That can be a Chapter 13, Chapter 11, or possibly another chapter. Reorganizations are discussed in another article. The rest of this article discusses liquidations.
LIQUIDATION CHAPTER 7
A sole proprietorship, including a Married couple owning a business, is really an individual filing bankruptcy since the business is not a separate entity. If a Chapter 7 is the desired option all debts and assets must be listed. This includes not only the business debts and assets but also personal debts and assets. When John Doe D/B/A Doe’s consulting files a Chapter 7 it will be filed in the name of John Doe and Doe’s consulting listed under Other Names. The individual(s) will get a discharge of most debts at the end of this type of Chapter 7. The discharge of the Chapter 7 does not prevent the Debtor from proceeding with a new business venture.
A Partnership that files a Chapter 7 must only list the business’s debts and assets. The partners must bear in mind that each will be personally liable for the debts of the Partnership so this bankruptcy may need to be done in conjunction with some personal bankruptcies for the partners.
A Corporation that files a Chapter 7 also may only list the assets and debts owed by the corporation.
There are Three (3) possible problems with Small Corporations. First, some or all of the debts may have been personally guaranteed by owners (the stockholders). Second, struggling businesses often defer paying Withholding taxes. Officers and Directors most likely will become personally liable for the Withholding taxes not paid. Third, if owners (the stockholders) have not kept the business entirely separate from their personal affairs, any creditor can seek to “pierce the corporate veil” and hold the managers liable for the debt.
In any of these scenarios, the business shuts down and its assets are liquidated. At the conclusion of the case there is no discharge for a partnership or corporation: the case is merely closed. Exemptions available to individuals are not available to corporations or partnerships.
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