Now a trustee will be assigned to each case

Now a standing trustee will oversee each case, assisting in the reorganization process and monitoring the business’s compliance with the Bankruptcy Code. The assignment of a trustee will greatly improve the chances of the successful completion of the plan of reorganization.

Only the debtor can propose a plan of reorganization

Previously, there was an exclusive period for a small business to propose a plan of reorganization, then any interested party could propose a plan for the business. Now, only the debtor can propose a reorganization plan. In addition, small business debtors no longer need obtain independent approval of a disclosure statement. Nor do small businesses in bankruptcy need to solicit votes for plan confirmation. These changes dramatically reduce the burden on small businesses in bankruptcy.

Small business bankruptcy is now more like Chapter 13

No longer must small business owners provide “new value” to retain control of their companies. Instead, the new law requires only that business owners commit all projected disposable income to the plan of reorganization, similar to a Chapter 13 bankruptcy. The plan’s term will span from three to five years, just like Chapter 13.

Small business bankruptcy just got easier

The Small Business Reorganization Act of 2019 greatly simplifies the bankruptcy process for small business owners. Business owners are no longer required to pay all debts in full in order to retain ownership of the business. The law provides more flexibility for business owners to reorganize, while cutting down the red tape.

If you are considering bankruptcy for your small business in the Washington, D.C. area, call Lee Legal for a free consultation.

You may want to renegotiate the debts and continue business operations. If that’s the case, Chapter 11 bankruptcy is a better choice than Chapter 7. Chapter 11 reorganization allows you to renegotiate debts and contracts while continuing to operate. Going concerns with one-off debt problems or individual problem creditors (like landlords) should consider Chapter 11. Many businesses, from time to time, experience temporary cash-flow issues and survive them intact.

On the other hand, Chapter 7 bankruptcy, or “liquidation” bankruptcy works well for businesses that want to discontinue operations once the bankruptcy is finalized. For single-member LLCs, partnerships, or family-owned businesses, Chapter 7 can resolve debt problems during and after the closure of the business. But the cessation of business operations sometimes also triggers liability for owners. You should carefully think through the possible effects on your personal assets if you are considering the Chapter 7 liquidation of a business.

Business Bankruptcy and Chapter 7 Liquidation

Chapter 7 bankruptcy, or “liquidation,” entails the sale of the assets of the business to satisfy unsecured creditors. If the business has no assets, then the trustee will label the business “no distribution.” In those cases, the bankruptcy ends very quickly. If the business has assets, then the bankruptcy trustee will assess and sell them.

Most businesses entering Chapter 7 do not have assets worth distributing. In most cases, at the end of the bankruptcy, the remaining balance of eligible debts of the business are no longer collectible. With no operations and no assets to pursue, the creditors of the business cease collection efforts. But in some instances, personal assets of the business owners may be at stake.

Personal Assets in a Chapter 7 Liquidation

A Chapter 7 business bankruptcy may impact your personal finances under certain circumstances. Both corporate structure and the nature of the debt influence how a business bankruptcy affects your personal assets.

Corporate structure. Incorporated businesses are entirely separate legal “persons” in the eyes of the law. Otherwise, the business bankruptcy and subsequent liquidation will not impact your personal finances in any way. But if your business is a sole proprietorship or a partnership, then your business is not a separate legal entity. You and your business may be considered to be one and the same “person.” As a result, a business bankruptcy is just like a personal bankruptcy. For example, if you file for Chapter 7 and you are a sole proprietor, the bankruptcy will show up on your own credit report. And your personal debts can also be included in the bankruptcy filing. In addition, any unexempt assets become part of the bankruptcy estate and can be sold to repay creditors.

Personal guarantee. Business bankruptcy most often affects personal assets where a business owner personally guarantees a business debt. In that case, the creditor can pursue separately and simultaenously both the business and the owner. A Chapter 7 bankruptcy for the business does not affect the creditor’s ability to pursue the business owner on the debt. At the conclusion of the Chapter 7, the owner of the business may still be personally liable for guaranteed debts.

Fraud or gross mismanagement. In less common cases, a Chapter 7 business bankruptcy may imperil the personal assets of the business owner accused of wrongdoing of some kind. Embezzlement, misuse of corporate funds, failure to pay employment taxes, and other negligent or fraudulent acts may give rise to business owner liability despite the business’s Chapter 7 bankruptcy.

Contact a Business Bankruptcy Attorney

To understand how bankruptcy for your business will affect your own money and assets, contact an experienced bankruptcy attorney. Serving Washington, D.C., Maryland, and Virginia, Lee Legal can help you to explore debt relief solutions for your business. When you see trouble on the horizon, the sooner you act, generally speaking, the more options you have.

In some cases, a business bankruptcy will affect not only the debts of the business, but also your personal assets and debts. Yet there are steps that you can take to limit those effects. Talk it over with an experienced business bankruptcy lawyer to ensure you make fully informed choices. You and your business don’t have to face your debts alone.

Chapter 7: Liquidation

Chapter 7, also called straight bankruptcy, allows you to discharge most types of unsecured debts. The discharge completely eliminates your liability on debts. Usually taxes, student loans, alimony, and child support pass through the Chapter 7 discharge.

Chapter 7 is an excellent option for individuals who have become overwhelmed by debt. Overwhelmed either by the amount of their debts or by the sheer number of creditors. In most cases, Chapter 7 is quick and painless, taking about three months from start to finish.

Chapter 13: Reorganization

Chapter 13 is a form of debt adjustment. Your bankruptcy attorney will work with you to formulate a payment plan that you can afford. Chapter 13 is sometimes also called the “wage-earner’s bankruptcy” because you will need a sufficient monthly income to support your repayment plan.

Chapter 13 is also an excellent option for those who need to stop a foreclosure because it gives you three to five years to catch up on missed payments. In some cases, we may even be able to strip off your second mortgage using Chapter 13 procedures. In general, Chapter 13 is more flexible than Chapter 7 for solving certain types of financial problems.

Chapter 11: Restructuring

Chapter 11 bankruptcy is the chapter of bankruptcy that you hear about in the news all the time because it is usually filed by large businesses. But Chapter 11 also available to individuals, usually those with significant assets. Chapter 11 allows you to restructure your debts and shares similarities to Chapter 13.

In a Chapter 11, the debtor (or “debtor in possession”) maintains control of the day-to-day operations of the business or the individual’s finances. In Chapter 11, the debtor in possession develops a plan to repay some or all of the debt owed to creditors over time.

Chapter 12: Family Farmers & Fishermen

Chapter 12 bankruptcy addresses a very specific group of debtors: family farmers and fisherman. A form of reorganization, Chapter 12 allows farmers and fisherman with steady income to pay back all or a portion of their debts over an extended period of time.

Chapter 12 is often used to finance significant debts due to equipment purchases or facility upgrades. Chapter 12 bankruptcy is uncommon in the immediate D.C. area but occurs in the more rural areas of Maryland and Virginia.

Which of the bankruptcy chapters is right for you?

Most people must decide between the bankruptcy chapters of Chapter 7 and Chapter 13. This can be a tough choice. If you are considering filing bankruptcy in DC, Maryland, or Virginia, call Lee Legal to discuss which of the bankruptcy chapters is best for you.

Business Bankruptcy: Chapter 7

Chapter 7 bankruptcy for a business requires complete liquidation of assets. All business assets (if there are any) will be sold for cash by a court-appointed trustee. After administrative and legal expenses, any remaining funds will go to creditors. Meanwhile, secured creditors will have their collateral returned to them.

If the company doesn’t have enough money to repay creditors in full, then the trustee will group creditors together in classes. The trustee will pay classes pro rata per claim. The court will notify any bondholders of the Chapter 7. All interested parties must file a claim in the case that a distribution takes place. Stockholders generally do not receive anything in return for their investments.

Why file a Chapter 7 for a business?

Businesses don’t get a discharge like consumer debtors. So why file a Chapter 7 for a business? Two important reasons.

First, filing a business bankruptcy may discourage creditor lawsuits. Business creditors often name business officers and shareholders personally in these types of suits. And creditors who feel short-changed can get very aggressive. Eliminating the “hassle factor” of lawsuits may lead to a filing.

And second, once a bankruptcy trustee assumes liquidation of the business, the business’s owners and officers can focus attention elsewhere. Liquidation can take many months to finalize, especially where the business has significant assets. Owners would rather move on to other opportunities than spend time on the the liquidation process. Retail and restaurants businesses fall into this category.

Business bankruptcy attorney serving DC, Maryland and Virginia

A Chapter 7 business bankruptcy can facilitate the final, orderly closure of your business. Call Lee Legal at (202) 448-5136 if you are considering a business bankruptcy in the Washington, D.C. area.