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2016 was a rocky year for restaurant chains. The flatbread franchise Cosí – which itself represents about a dozen additional franchises – became the eighth chain to declare bankruptcy by the end of September. During the first months of 2017, Pittsburgh-based Perkins owner Unique Ventures Group filed for Chapter 11, closing nearly 30 locations. Struggling to attract diners in a pinched economy, countless restaurant owners from all over Pennsylvania are weighing bankruptcy as a legal option. Perhaps you or someone you love is one of them. Our Pennsylvania bankruptcy lawyers explain how filing for bankruptcy could affect your restaurant.

Types of Bankruptcy for Restaurant Owners in Pennsylvania

According to National Restaurant Association statistics, there were more than 25,400 establishments in the state of Pennsylvania as of 2016, collectively employing close to 394,000 people. However, between economic decline, the rise of meal delivery services, and an increasing emphasis on sustainable, health-conscious dining options, countless eateries ranging from upscale bistros to mom-and-pop diners have struggled to operate profitably, with Cosí and Perkins serving as just two of the many examples.

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If you are a Pennsylvania restaurant owner, and persistent financial challenges have led you to consider filing for bankruptcy, there are some important facts you should understand about various types, or “chapters,” of bankruptcy as they pertain to small business owners.

Chapter 7, Chapter 11, and Chapter 13 for Small Business Owners

  • Chapter 7Chapter 7 bankruptcy is a liquidation bankruptcy in which a court-appointed trustee will sell your restaurant’s assets, such as dining tables, delivery vehicles, commercial cooking equipment, and real property. The proceeds from these sales will be divided among your creditors in order to repay your debts. Because bankruptcy exemptions do not apply to business bankruptcies, they cannot be utilized to protect business assets the way they would in a personal bankruptcy case.

    When a restaurant files for Chapter 7 in Pennsylvania – or, for that matter, in other states – the end result is that the restaurant will close. If you are uncomfortable with this outcome and wish to avoid liquidation, Chapter 7 is probably not the appropriate bankruptcy option for you. However, you should also keep in mind that it is possible to open a new restaurant after filing for Chapter 7, so bankruptcy certainly does not have to signal the end of your dream of becoming a successful restaurateur.

    Obtaining the necessary business loans to start a new restaurant is likely to be challenging with a Chapter 7 on your credit report, where it will remain for a period of 10 years. However, that doesn’t mean it is an impossible task. You will have a better chance of qualifying for a loan with a prior bankruptcy if you can raise your credit score, prepare a clear and cohesive business plan, and demonstrate to potential lenders that you have a consistent, reliable source of income.

  • Chapter 11 – In order to maintain control over your business and continue operating during the bankruptcy, you will be required to file under Chapter 11. However, while Chapter 11 can potentially keep your restaurant alive, it can also be a costly, time-consuming, and intensely complicated legal remedy for debt. Depending on the circumstances, from a financial standpoint it may be more pragmatic to file under Chapter 7.

    Filing for Chapter 7 can save the time and expense associated with converting from Chapter 11 to Chapter 7 later in the process, which will become necessary if it turns out that the restaurant is unable to generate the income needed to repay creditors. Case conversions increase costs and slow the bankruptcy process down, so it is vital to select the appropriate chapter at the beginning of the filing process.

  • Chapter 13Chapter 13 bankruptcy is only available for individuals, including people who are filing bankruptcy jointly with their spouses. Because business entities are prohibited from filing under Chapter 13, this particular bankruptcy option is not suitable for restaurant owners. Generally speaking, the only type of business owner who can file under Chapter 13 is a sole proprietor, as sole proprietorships are not considered legally distinct from their individual owners. If your restaurant is structured as a corporation or limited liability company (LLC), the only business debts you may include in a Chapter 13 bankruptcy are those for which you are personally liable, such as a debt which you have personally guaranteed.

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Pennsylvania Bankruptcy Attorneys Serving Montgomery and Delaware County

If you’re worried your restaurant or other small Pennsylvania business is in jeopardy of becoming insolvent, it may be time to think about filing for bankruptcy. Depending on the extent of your restaurant’s debts and assets, and upon what sorts of goals you have set for your business, it may be prudent to declare Chapter 7 bankruptcy or explore other options, including alternatives to bankruptcy. However, in order to get the most out of your bankruptcy, strategic timing and meticulous planning is essential.

Don’t jump into the complexities of bankruptcy without forming a clear plan first. Get personalized legal guidance from a knowledgeable Montgomery County Chapter 7 lawyer or Delaware County Chapter 7 lawyer who has years of experience representing small business owners in Southeastern Pennsylvania. Call Sadek & Cooper Law Offices at (215) 995-2543 for a free and confidential consultation today.