It’s been a year since the COVID-19 pandemic started. Most Americans suffered a great deal: health problems, loss of loved ones, and financial problems. Businesses that were not able to cope with the virus are faced with the decision about whether or not to file for bankruptcy.
The bankruptcy process helps a business repay or wipe out unpaid debt with the protection of the bankruptcy court, giving them a fresh start. A business may undergo either bankruptcy reorganization or liquidation, depending on the bankruptcy chapter filed.
A business may file for three types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13, which can all be found in the US Bankruptcy Code.
Below, we’ll discuss these bankruptcy chapters in brief. If you’re considering bankruptcy options, it’s best to consult with experienced bankruptcy attorneys. The Monroe bankruptcy specialists at E. Orum Young Law Offices are ready to help you.
Chapter 7: Liquidation
Chapter 7 is best when the business:
- Has no profitable future
- Has no substantial assets
- Has so much debt that restructuring these is not practical
To qualify for a Chapter 7 bankruptcy, the applicant must undergo a means test to check if their income is under a certain threshold. If it goes over, the applicant must file through another chapter.
For this chapter, the bankruptcy court appoints a trustee who would take the debtor’s non-exempt assets and sell them (like through foreclosure). The trustee would use proceeds from this to pay off the creditors. After bankruptcy, the owner receives a discharge, releasing them from any obligations and liabilities to pay back the debts. Take note that not all debts are qualified for a bankruptcy discharge. Talk to a Monroe bankruptcy lawyer to know if your debt may be discharged when you declare bankruptcy.
Once the bankruptcy ends and every creditor is paid off, the business dissolves.
Chapter 11: Business Reorganization
Chapter 11 is your choice if:
- The business can still turn around
- You want to keep the business running
- You don’t meet the income qualifications of Chapter 13
- Your debt is over the limit for Chapter 13
Under Chapter 11, the business would restructure its debt and keep running under a court-appointed trustee. Chapter 11 bankruptcies take a long time (usually over a year for approval) and many don’t succeed. Thus, sole proprietorships would usually opt for a Chapter 13 if possible.
The company files a reorganization plan which details how they plan to deal with the creditors. Under the plan, the company can recover assets, discharge some debt, pay off others, terminate leases or contracts – basically whatever is needed to be profitable again.
Small Business Reorganization Act of 2019
As of Feb. 20, 2020, the Small Business Reorganization Act of 2019 has been in effect, enacting subchapter V in Chapter 11. This subchapter seems to favor the bankruptcy applicant. They may choose whether or not they want this subchapter to apply to their bankruptcy filing.
If you’re a sole proprietorship or an incorporated entity contact our Monroe, Louisiana bankruptcy law firm to explore all your options. Our bankruptcy law experts will tell you whether you have alternatives to bankruptcy, which chapter fits your case, and whether your debt will be wiped out.
Chapter 13: Reorganization for Individuals
We recommend that your bankruptcy petition be filed under Chapter 13 if:
- The business can be profitable in the future and you want to keep it running
- You qualify for the income requirements
- Your debt fits the limit
- You want to avoid the complications of Chapter 11
It’s a reorganization, much like Chapter 11. You file a repayment plan with the bankruptcy court which details how you will reorganize your debt and your plan to pay them off. Usually, all your disposable income will be dedicated to paying off your plan.
The amount of the monthly payments depend on how much your monthly income is, how much property you own, and how much debt you have. If your assets and business assets are involved with each other, you can avoid repossession or foreclosure of your property with Chapter 13.
Bankruptcy lawyers can help your business file for corporate bankruptcy, deal with the paperwork, and prevent bankruptcy fraud. If you’re from Louisiana, contact E. Orum Young Law Offices to get a free case review.