Bankruptcy Relief and Small Businesses
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, meaning they can file a Chapter 7 Bankruptcy and/or a Chapter 11 Bankruptcy.
- Proprietorships are just an extension of the owner meaning, a bankruptcy cann not be filed on behalf of the proprietorship alone, meaning the proprietor (individual owners(s) must file bankruptcy. The bankruptcy will look into the assets and liabilities of the individual owner as an extension of the business itself. The individual owner may file a Chapter 7 Bankruptcy, Chapter 11 Bankruptcy or Chapter 13 Bankruptcy.
Advantages and disadvantages to corporate reorganization under Chapter 11 Bankruptcy.
- Reorganization can’t create a market; increase gross revenue, or make up for a poor fit between the skills available and the skills required to run the business.
- 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 improvident equipment purchase); or prevent the loss of vital assets or cash to creditor collection actions.
Bankruptcy reorganization in Chapter 11 requires significant time on the part of the owners and managers to comply with the requirements of the bankruptcy system, interface with counsel, and negotiate with creditors. The “bankruptcy bargain” is that, in exchange for the protection of the bankruptcy protections, including the automatic stay, the debtor provides full disclosure of its financial 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.
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.
When Chapter 7 is best
A Chapter 7, whether for the individual or a corporation, may be the best choice when
- The business has no future,
- It has no substantial assets or qualities that cannot be reproduced after bankruptcy, or
- The debts are so overwhelming that restructuring them is not feasible.
If there are any general questions or topics you would like to read about relating to bankruptcy law in the Philadelphia, Pennsylvania region, you may contact the Philadelphia Bankruptcy Lawyers at Sadek Law Offices, LLC at 215-545-0008 or email brad@sadeklaw.com. Thank you.