McNamee Hosea News & Press


Business Debt: Options for Small Businesses Struggling Financially

Bankruptcy may be a viable debt relief option for businesses that struggle financially.

Businesses that struggle financially are not alone. According to recent data from the American Bankruptcy Institute, there were 30,018 commercial filings during calendar year 2015, a 14 percent drop from 34,749 filings during the same period in 2014.Conversely, commercial chapter 11 filings rose by two percent from 5,188 filings during 2014 to 5,309 filings during calendar year 2015.

Determining whether bankruptcy is necessary and, if it is, which chapter is appropriate for your business can be difficult. The following can help.

Business bankruptcy: The process.

In order to file for bankruptcy, the petition for relief must be approved. This petition requires a range of information, including a list of the business’ assets and liabilities as well as any contracts and leases. Once approved, the court issues an automatic stay. This court order requires that all creditors cease from attempting to receive payments. 

The chapter that works best for a business depends on the details of each situation. Some of the more common options include:

  • Chapter 7. This option is generally considered for sole proprietorships. A Chapter 7 bankruptcy petition uses a trustee to review the assets and liabilities of the business. Assets may be sold, and proceeds distributed to creditors. After this is complete, the business owner’s remaining debts are generally discharged. This means the business owner is no longer liable for these debts.
  • Chapter 11. This chapter is an option for partnerships, companies or corporations. Once approved, an automatic stay goes into effect. A financial disclosure statement is then put together and sent to creditors. If approved, a reorganization plan will be developed. The plan will require the approval of the bankruptcy court. The business will then use this reorganization plan to slowly repay creditors. This option is designed to allow the business to continue operations throughout the process.
  • Chapter 13. This plan, like a Chapter 11, is designed to allow the business owner to enter a more manageable repayment plan while continuing to operate the business. However, unlike a Chapter 11, this form of bankruptcy uses a trustee and is generally only an option for sole proprietors.

These are just a few of the issues to consider when determining which bankruptcy petition is the right option for your unique situation. Additional factors to review can include the cost of each chapter and eligibility requirements.

Business bankruptcy: The importance of legal counsel

It is important to note that bankruptcy does not have to lead to the end of the business. Many well known businesses have filed for bankruptcy in the past, using the process to jump start a more financially secure future. Examples include Texaco and Macy’s.

Business leaders that are considering bankruptcy for their business are wise to seek the counsel of an experienced business bankruptcy attorney. This legal professional will guide you through the process, advocating for your rights and working to better ensure a more favorable outcome.