Earlier this month, electronics and clothing retailer HHGregg announced a decision to close 88 stores in over a dozen states, including Pennsylvania, as part of an effort to restructure the business through Chapter 11 bankruptcy. However, though often utilized by large chains and corporations like HHGregg, Chapter 11 is seldom suited to local family-owned businesses due to the considerable expense involved. Therefore, if you’re a business owner who’s thinking about filing for bankruptcy in Pennsylvania, you should understand some basic points about the other bankruptcy options that may be open to you, such as Chapter 7 or Chapter 13. Our Philadelphia bankruptcy lawyers explain how these types of bankruptcy can affect a business, including the company’s ability to continue operating during the case.
Can I Continue to Run My Business if File Chapter 13 in PA?
There are two broad types of bankruptcies: personal bankruptcy, which involves individuals or married couples who file together, and business bankruptcy, which is self-explanatory. Chapter 7 and Chapter 13 are typically associated with personal bankruptcy, though Chapter 7 is sometimes utilized by business entities, while self-employed individuals sometimes file under Chapter 13 using their own names.
That is because businesses may not file under Chapter 13 in Pennsylvania, nor in any other state, due to restrictions established by federal law. These restrictions apply regardless of whether businesses are structured as S corporations, C corporations (such as HHGregg), partnerships, or LLCs. Such regulations derive from 11 U.S. Code § 109, the statute within the U.S. Bankruptcy Code that establishes who may file under various chapters. Specifically, 11 U.S. Code § 109(e) provides the following: “Only an individual with regular income… or an individual with regular income and such individual’s spouse… may be a debtor under chapter 13 of this title.”
While a business may not file under Chapter 13 in either courthouse location for the United States Bankruptcy Court for the Eastern District of Pennsylvania (Philadelphia and Reading), an individual may. However, both of the following criteria, which are established by 11 U.S. Code § 109(e), must be satisfied:
- His or her unsecured debts must be less than $383,175. (The original figure in the statute is actually $250,000, but this figure is periodically adjusted to account for inflation.)
- His or her secured debts must be less than $1,149,525. (The statute cites $750,000 as the original figure, but, once again, the figure is adjusted for inflation.)
Additionally, the debtor must undergo means testing to prove that he or she has adequate disposable income to make full or partial repayments to certain creditors, which are mandatory in Chapter 13. Otherwise, the debtor will be required to file for Chapter 7, in which case the business will typically cease to operate due to the sale of its assets (e.g. land, buildings, vehicles, equipment, inventory) by the trustee administering the case.
Filing for Chapter 13 as an individual can have a profound effect on your business if you are a sole proprietor. Though you will file in your own name, you may include various business debts in your bankruptcy, provided you are personally liable for such debts. Critically, you will also be able to keep your business open while the case is ongoing, meaning you can continue operating your sole proprietorship while you pay off your debts over the course of your three- to five-year plan of reorganization, which is the central pillar of any Chapter 13 case.
Keep in mind that if you are unable to make the payments established in your plan, you may be required to convert the case to Chapter 7, in which case there will be a small fee of $25. Chapter 7 may be converted to Chapter 11, but the conversion fee is substantially higher at $922.
While each case varies, the following basic rules provide an overview of business bankruptcy in Pennsylvania:
- Individuals and all types of businesses may file under Chapter 7, provided they meet certain financial requirements. However, their assets will be liquidated, and the business will generally close.
- All types of businesses may file under Chapter 11, provided they meet certain financial requirements. This will allow the business to stay open and continue operating under the same ownership. However, this option can be costly and time-consuming, which makes it inefficient in many situations.
- Only individuals may file under Chapter 13, including sole proprietors filing in their own names. However, certain business-related debts may be discharged in Chapter 13.
Philadelphia Bankruptcy Attorneys for Chapter 13 and Chapter 7
If you’re a small business owner in Pennsylvania, and you’re considering bankruptcy due to financial distress and overwhelming debt, you should discuss your legal options with a Chapter 7 or Chapter 13 attorney who has a record of effectively handling bankruptcy cases similar to yours. At Sadek & Cooper Law Offices, our distinguished legal team includes Philadelphia Chapter 7 lawyers and Philadelphia Chapter 13 attorneys who are ready to answer your questions, explain the obstacles that may arise in your case, and help you make informed decisions that align with your best interests.
Our skilled bankruptcy lawyers have helped more than 4,000 clients get relief from debt. To talk about how filing for bankruptcy could help resolve your debt-related issue, call our law offices at (215)-545-0008 for a free and completely confidential bankruptcy consultation.