How Business Owners Can Decide If It's Time to File for Bankruptcy
The largest Chapter 11 bankruptcies due to the COVID-19 pandemic so far include Hertz, LATAM Airlines, Frontier Communications, JCPenney, and Neiman Marcus. The industries hardest hit and with the most bankruptcy filings are:
- restaurants
- construction
- real estate
- healthcare
- oil and gas
- retail
- ?transportation.
If you think bankruptcy is inevitable for you or your business, here’s an overview of your options.
Chapter 7
Chapter 7 will usually liquidate (sell off) and close your business. Under Chapter 7, the court appoints a trustee that sells off all your assets and distributes the proceeds to your creditors.
Most people can exclude a retirement account in bankruptcy, so assess your situation before you use retirement funds to pay off debts. Usually, you also get to keep some equity in your home and car, retirement funds, and some household items like furniture.
If you have an interest in your business, you can file Chapter 7 for yourself to discharge personal debt and keep your business open. You can also use Chapter 7 to discharge any personal liability for business debt.
Unfortunately, you will likely lose your home under Chapter 7. If you have enough equity in your home, the trustee will likely sell off your home to pay creditors. But if you are behind on mortgage payments and selling the home would not create much value, you will face foreclosure.
So if you want to keep your home, try negotiating with your lender, ask for government help, or contact a lawyer to discuss your options.
If you think you’re going to have more debts in the near future, you may want to wait a while before filing for Chapter 7 bankruptcy so you can discharge those future debts as well. If you file for Chapter 7 now, you will have to wait another eight years before being eligible for bankruptcy again.
Most importantly, Chapter 7 can be tricky, so it’s helpful to have a lawyer guide you through the process. Remember that our lawyers are affordable - far more affordable than many other options out there. We've kept our prices low specifically to help people in tight financial spots.
Chapter 11
A company that is still producing income but struggling to pay some bills will probably file for Chapter 11.
Chapter 11 is expensive, but it allows you to keep your business.
Under Chapter 11, a business can reduce and restructure debt payments so the company can stay in business. Although Chapter 11 can be costly, special rules for small businesses affected by the pandemic allow these businesses to stay open.
Chapter 13
Only individuals can file for Chapter 13. Under this filing, you can keep your property, including your home, car, and business.
Chapter 13 allows you to repay your debts through a repayment plan over 3-5 years, while ensuring that your creditors get the same amount as if you filed Chapter 7. So you can save your home from foreclosure with Chapter 13.
In General...
Bankruptcy will damage your credit score. But if you are already missing payments, your credit score is probably already low. If so, bankruptcy can help you improve your credit score faster by helping you restart your life.
After you file for bankruptcy, you can open a credit card (they know you can’t discharge your debt again for several years), get a car loan (but at high interest rates), and potentially qualify for a mortgage (depending on the lender).
Bankruptcy also requires most creditors and debt collectors to stop harassing you until the bankruptcy is complete. Although you can’t usually stop creditors from contacting you, you can stop annoying debt collectors by sending them a letter asking them to stop, which they are required to do under the Fair Debt Collection Practices Act.
Bankruptcy can depend on a variety of factors including:
- The legal form of your business
- Whether you hold personal liability for business debt
- Whether you want your business to stay open
- The amount and type of debt
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
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