Businesses can file bankruptcy under either Chapter 11 or Chapter 7 of the Bankruptcy Code. Chapter 11 bankruptcy is the “reorganization” chapter, and Chapter 7 is the “liquidation” chapter.
The Big Picture
Businesses sometimes fail, and sometimes they are just failing. This is a key distinction. So, here’s a very important question: If a business is failing because it can’t pay its debts and expenses, is the business worth saving?
It’s a tough question, and sometimes it can be difficult to answer honestly. Sometimes the answer is yes. Sometimes, no. Generally, “yes” means a reorganization is worth trying, and if the answer is “no” then liquidation may be the best path. There are other ways to achieve these goals besides bankruptcy (and we are experienced in business debt negotiation and work outs while holding out the possibility of bankruptcy). However, ultimately, bankruptcy is the formal legal system for business reorganization and liquidation, so it has quite a few strengths and advantages. The first of which is that the automatic stay immediately stops the feeding frenzy and all attempts to collect debts from the business.
If you want to cut ot the chase, and get a free business bankruptcy consultation, email firstname.lastname@example.org or call the number above.
Bankruptcy Reorganization in Chapter 11
When should a corporation, limited liability company (LLC), or other business try to reorganize in Chapter 11? First, the business must have problems with debts, not just expenses. Ask yourself this: if my debts were to go away, would I be able to market and sell my product or service, pay my employees and overhead (even with lay offs and some cutbacks), and other expenses and make a profit (or at least a fair salary for myself)? This is the first step in determining if your business has real value as a going concern. Is there something worth saving? In a Chapter 11 reorganization, debts may be reduced or restructured in such a way that makes a business viable again. Fundamentally, the bankruptcy system asks a very basic question: Is the business worth more dead than alive, or more alive than dead? Think about this for a second.
Going concern value is, of course, not the only kind of business value. A business may have valuable assets such as equipment, intellectual property, or accounts receivable. If a business is worth more alive than dead, a reorganization may make sense. However, a business must have real value worth saving because Chapter 11 bankruptcy is a more expensive type of bankruptcy (although we work with a business owners to find affordable solutions). A Chapter 11 can work wonders under the right circumstances. Here are some parting words from an appreciative business owner who reorganized in Chapter 11.
“Thanks to you that yesterday even happened. I appreciate everything you have done to help save our business.” — President, Homeland Office Products and Equipment, Inc., Plymouth, Massachusetts, December 2011.
You can get more Chapter 11 bankruptcy details here.
Chapter 7 Business Bankruptcy
Sometimes the hard truth is that a business is not worth saving. If there’s a silver lining in this situation like this, it’s that the business bankruptcy system generally allows entrepreneurs to move on from failing businesses and so that they can start new ones in the future. (And get various forms of credit). This has always been essential to our economic system and success. If the consequences of business failure were too harsh, few would even try in the first place. However, when a business and/or business owner has unpaid debts, there are real consequences, and bankruptcy is sometimes the only way to preserve assets and income.
Business bankruptcies in Massachusetts under Chapter 7 come in many shapes and sizes, so a personalized assessment is necessary.
Bankruptcy for the Business Owner, the Business, or Both?
A “business” bankruptcy can sometimes be a personal bankruptcy for a business owner (caused by the business debt), or it can be a bankruptcy for the LLC or corporation itself. These are very different types of bankruptcies. Sometimes both are necessary.
Personal bankruptcies for business owners are very common. They are usually caused by the owner’s personal guarantee of business debt. When a business fails, lenders seek to enforce these guarantees in court, and business owners often have no choice but to file bankruptcy when faced with large personal judgments. One bit of good news is that rules for these “business-personal” bankruptcies are more lenient than for straight consumer bankruptcies, at least when it comes to income issues. This is because the “means test” does not apply in Chapter 7 cases with primarily business debts. So, if you make a lot of money (perhaps after returning to work in your original field), this will not stop you from filing Chapter 7 bankruptcy. However, chapter 7 “business-personal” bankruptcies are nottreated any different when it comes to assets, however–and in some of these cases there can be significant non-exempt, personal assets. If a business owner wants to keep those assets, a Chapter 13 will often be a way to accomplish that.
We have a great deal of experience dealing with these “business-personal” bankruptcies and can help you make smart strategic decisions. We have experience and know-how when it comes to asset protection and pre-bankruptcy planning.
A Chapter 7 bankruptcy can also be filed for the corporation or LLC itself. These business liquidations often make sense if the business has little value, but the decision involves the amount of business assets and the aggressiveness of the business creditors. If a business has significant value, it can sometimes be better to reorganize in Chapter 11 or, failing that, to do a liquidating Chapter 11.
Good and early planning is essential in closing down a failing business. Please do not do anything drastic (like transfer assets outside the normal course of business) before speaking to a bankruptcy attorney. There can be serious consequences if such transfers are conducted in the wrong way.
Links to more information on business bankruptcy in Massachusetts
- Chapter 11 Bankruptcy
- Liquidating in Chapter 11 versus Chapter 7 (blog post)
- Fraudulent Transfers and Closing a Business (blog post)
- Winding Down a Business in Massachusetts (blog post)
- Bankruptcy Preferences Cases
You can give us a call at 617-338-9400 or submit this form if you want to get a free consultation and fee quote for your case.