5 Questions to Ask Before Thinking About Chapter 7 Bankruptcy For Your Small Business

English: Linens 'n Things going out of busines...

English: Linens ‘n Things going out of business at New Hope Commons in Durham, North Carolina. (Photo credit: Wikipedia)

As a small business owner, your business is your life. If you have difficulty paying your bills, are constantly being harassed by debt collectors, or don’t see any possibility of running your business successfully in the future, you might think about whether you should consider Chapter 7 bankruptcy as an option for liquidating your business and moving on with your life.

But Chapter 7 is not right for every small business with financial problems, and in fact, there are many situations when bankruptcy would offer little benefit to the business.  Although a lot of things come into play when deciding whether to file bankruptcy, here are five questions to consider when deciding if Chapter 7 is right for your financially troubled business:

1.     Will your business turn around, or is it really time to pull the plug?

When you file for Chapter 7, the bankruptcy “automatic stay” immediately protects you from your creditors. In exchange for that protection you agree to allow the bankruptcy trustee to liquidate all non-exempt assets in order to pay those creditors. This effectively ends your small business.

If your business is going through a slow cycle but you can see brighter days ahead, Chapter 7 is probably not your best option.   On the other hand, if your business has slowed to the point where you don’t believe it can recover, or you have lost all income sources, a Chapter 7 filing is a possibility that you might consider.

2.     What is the legal structure of your business?

Most small businesses are structured either as sole proprietorships or they have a legal structure like a corporation or limited liability company.  How you have set up your company can make all the difference between whether or not you face personal liability for a business’s debt and whether bankruptcy is your best option.

A “sole proprietorship” is a company that from a legal point of view is indistinguishable from you as a person.  It may be a “dba” that is operating with a name other than yours – say “Midtown Florist” – but legally it is the same as you.  The businesses assets are the same as your assets.  When sole proprietors file bankruptcy, the business does not file separately; its assets and liabilities are included with the owner’s.   If your company is a sole proprietorship, a Chapter 7, Chapter 13, or even Chapter 11 bankruptcy may be your best option.

3.     What assets does your business have?

Because Chapter 7 bankruptcy liquidates non-exempt assets, evaluating your assets is necessary before you decide to file.   If you have significant business assets you might be able to restructure your debt through a different type of bankruptcy, such as a Chapter 11, or in the case of a sole proprietorship a Chapter 13. This would offer a restructuring that would let the business survive.

Also, if a business has substantial assets, a Chapter 7 liquidation allows for an orderly liquidation of those assets to get debts paid fairly.  Otherwise, there can be a scramble by creditors to get judgments and liquidate assets in a chaotic “first cme first served” fashion.

On the other hand, if your business has very little in the way of assets, there may be no reason to consider bankruptcy.  There are circumstances where it simply makes sense to let the business just wind down without filing bankruptcy.

4.     Does your business have tax debt?

Owners can sometimes personally be responsible for employee trust fund taxes that a business has failed to pay.  The orderly liquidation of a Chapter 7 bankruptcy can allow a business to pay those debts that need to be paid to avoid personal liability for the owner.

5.     Are there debts that you have personally guaranteed?

Likewise, owners can personally guarantee debts like lines of credit.  A Chapter 7 liquidation can make sure that at least some of the funds from the liquidation of assets go to pay debts the owner could be on the hook for.

About the Law Office of James C. White

We represent individuals and businesses in Durham, Wake, Orange and surrounding counties in North Carolina Chapter 7, Chapter 11 and Chapter 13 Bankruptcies.  We provide individualized service and attention to each of our clients, looking  at their financial situation to see whether bankruptcy could help save their home or offer a fresh start.   You can contact us to schedule a free consultation to talk through bankruptcy issues by calling us at 919-313-4636.

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Jim White
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Jim White helps people and companies facing serious financial injury by bringing and defending lawsuits and representing debtors in bankruptcy. He has successfully taken on banks, large financial institutions and other corporations in “David v. Goliath” cases. You can reach him at 919-246-4676.