Small businesses and Bankruptcy relief
Your business is in a bad way: how do you decide if Bankruptcy is necessary or helpful for your position?
First, is the business a corporation, a partnership, or a proprietorship?
Corporations, limited liability companies and partnerships are legal entities separate from their shareholders or partners. They can file Chapter 7 or Chapter 11 Bankruptcy in their own right.
Bombshell for partnerships in Chapter 7
Proprietorships are merely an extension of the owner: they can’t file Bankruptcy alone: the proprietor must file Bankruptcy, since the assets and the liabilities of the business are really only one form of assets of the proprietor. The individual owner may file Chapter 7, Chapter 11 or Chapter 13 (if the debt limits are met – see Chapter 13 eligibility standards.)
Should the business be reorganized or liquidated?
To answer these questions, you would have to recognize what has caused the troubles the business now faces and what are the prospects for change:
• Reorganization cannot make a market; increase gross sales; or compensate for a poor fit between the skills available and the skills required to run the commercial enterprise.
• Reorganization could free up cash from servicing the old debt to permit current operations; permit rejection of leases or contracts that are no longer advantageous (an expensive facility lease or imprudent equipment purchase); or prevent the loss of vital assets or cash to creditor collection activities.
• In between Chapter 7 liquidation and reorganization, a liquidating Chapter 13 or Chapter 11 could provide a breathing space for the owners to sell the business as a going concern or or its assets in something other than a fire sale.
The resulting proceeds could pay taxes or unpaid salaries; sale of the business can provide ongoing jobs for the work force under new ownership. The Bankruptcy could then be changed to Chapter 7 or dismissed if Bankruptcy protection is no longer needed. The court will probably condition dismissal of the case on payment to creditors of the sale proceeds.
Possible pitfalls for management
Does management have the resources and want to engage the reorganization process? Bankruptcy reorganization in Chapter 11 calls for substantial time on the part of the owners and managers to comply with the requirements of the Bankruptcy system, meeting with counsel, and negotiate with creditors. It is usually expensive also. The “Bankruptcy bargain” is that, in exchange for the protection of the automatic halt and other Bankruptcy protections, the debtor provides entire revealing of its economic condition to creditors and the court, both at the beginning of the case and on a monthly basis thereafter, and operates as a fiduciary for its creditors while the Bankruptcy is ongoing. A reorganization can drain an already troubled organization of management time to participate in Bankruptcy legal proceeding and revenue since the legal expenses are substantial. Most reorganizations fail, usually for lack of a real plan to solve the problems. Is the business one that the owners could start up again after a liquidation of the current business? Businesses that require little capital, have few assets, or are really just extensions of the owner’s skills and personality are ones that it may not pay to reorganize. The owners may be better off liquidating the business, in or out of Bankruptcy, and starting over in a fresh entity.
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