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When Should A Small Business File For Bankruptcy?

Published July 7, 2023 by Sasser Law Firm
When Should A Small Business File For Bankruptcy?

Many small business owners may be uncertain about what to do when their business is struggling and at what point to file a small business bankruptcy. The right steps to take will depend on the specifics of the situation. But seeking bankruptcy protection may be an appropriate step if you have tried other options and still face unmanageable debt.

Bankruptcy allows a small business to discharge or restructure its debt and get its finances on a sound footing. Although bankruptcy can be beneficial, there are some drawbacks to consider. You should talk with a bankruptcy attorney before making a decision about when to file bankruptcy for business.

Should My Business File Chapter 7, Chapter 11, or Chapter 13?

After deciding that bankruptcy is appropriate for you, choosing which chapter of the bankruptcy code to use is the next step. The three types of bankruptcies for businesses include:

  • Chapter 7 – With Chapter 7 bankruptcy, a trustee is appointed to liquidate the assets and shut down the operations of the business. This option may be the way to move forward if your business is overwhelmed with debt and you cannot see a future for your business. It’s less time-consuming and costly than other bankruptcy options. No discharge will be granted to a registered entity that files for chapter 7 and a registered entity is not entitled to exempt any property. If an individual files chapter 7 then a discharge is generally granted, and an individual can exempt certain assets from liquidation.
  • Chapter 11 – A Chapter 11 bankruptcy allows a small business to develop a reorganization plan and restructure its debt to pay it down over time while continuing to operate.
  • Chapter 13 – Chapter 13 bankruptcy is a way for an individual or married couple that runs a small business as a proprietorship to reorganize the business and pay down debt. Chapter 13 is not available to corporations, LLCs, or other registered entities.

Small Business Reorganization Act (SBRA)

The Small Business Reorganization Act, signed into law in 2019, aims to make the small business bankruptcy process more efficient and less expensive for businesses that qualify as small businesses. The act includes provisions such as:

  • Streamline the reorganization process – The act streamlines the process and removes procedural costs and requirements associated with typical corporation reorganizations. Small businesses can submit a restructuring plan and have it accepted more quickly.
  • Appointment of a trustee – The act provides for the appointment of a trustee for a small business debtor. A trustee must assist the debtor in developing a reorganization plan, facilitate the debtor’s reorganization, and monitor the fulfillment of the reorganization plan.
  • Reorganization Plan – The act gives the court authority to approve a reorganization plan over the objection of creditors.
  • Discharge limitations – The court will grant a discharge to the debtor after it completes all payments due within three years (or a longer period as determined by the court that does not exceed five years). The discharge relieves the debtor of its liability for debts under the plan with some exceptions.
  • Residential mortgage modification – The prohibition against individual small business debtors from modifying their residential mortgages doesn’t apply. A small business debtor can modify a mortgage secured by their residence if the loan was primarily connected with the small business and wasn’t for the purpose of acquiring the residence.
  • Delayed payment of administrative expense claims – The debtor doesn’t have to pay administrative expense claims, including claims incurred for post-petition services and goods on the plan’s effective date.

Contact the Business Bankruptcy Attorneys at Sasser Law Firm 

At Sasser Law Firm, our three board-certified bankruptcy specialists have handled more than 10,000 bankruptcy cases in more than two decades. That includes cases to the 4th Circuit Court of Appeals and the U.S. District Court. Our firm focuses entirely on bankruptcy cases.

If you face unmanageable debt as a small business owner and want to learn about bankruptcy for business in North Carolina, contact a board-certified bankruptcy attorney with Sasser Law Firm.

Call (919) 319-7400 for a free consultation today.

This post was previously published in June 2020, it was updated in July 2023 for accuracy and relevance.

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