Choosing Between Chapters 7 and 11 for Small Business Bankruptcy

Bankruptcy attorney guides Georgia firms to best bankruptcy options

If you are a small business owner overwhelmed with debt and are considering bankruptcy, you might be debating whether to pursue a Chapter 7 liquidation or a Chapter 11 reorganization. Jeff Field & Associates can help you choose the remedy that is best suited to resolving your situation.

What is the difference between Chapter 7 and Chapter 11 bankruptcy?

In bankruptcy for small business owners, Chapter 7 and Chapter 11 have different outcomes. Chapter 7 results in the closure of your business and the sale of its assets to pay off creditors. Chapter 11 lets you keep running the business as you pay off many of its debts according to a reorganization plan. Your choice of chapter will depend on your objective. Chapter 7 allows you to free yourself of an unprofitable business and perhaps to salvage some business assets by claiming them as exemptions. Chapter 11 gives you a chance to bring the business to a profitable state, but only if you can make the debt payments required under the plan.

Can a small business file for Chapter 7?

Filing a Chapter 7 for small business may be a viable bankruptcy option depending on how your own business is organized.

If the business is a sole proprietorship, you must file for Chapter 7 in your own name, which allows you to protect your personal assets from seizure by business creditors. You will need to pass the means test unless your business debt exceeds your personal debt. You may be able to exempt certain property from your creditors, possibly allowing you to stay in business.

If your business is a partnership, corporation or limited liability company (LLC), it can file for bankruptcy as a separate entity and won’t need to pass the means test. However, individual partners remain personally liable for partnership debts. If you co-signed or guaranteed a business debt, you are liable as well. Furthermore, there are no exemptions of property available to business entities. This means that all of the company’s assets will be liquidated, leaving the business insolvent.

We can fully explain the consequences of Chapter 7 for you and your small business and advise you on the best course of action.

What happens under Chapter 11?

Chapter 11 allows your small business to renegotiate the terms of its debt obligations with some or all of its creditors and to repay debts on a manageable, court-approved schedule, even over some creditors’ objections. Meanwhile, your business can continue to operate under your control as long as you act in good faith. If your business completes the repayment plan, its remaining debts will be discharged and it can stay in business. Chapter 7 will lower your business’s credit rating but you can usually obtain debtor-in-possession loans to help finance the reorganization. We can explain how a Chapter 11 plan works and help you analyze if you can manage one.

Are businesses required to complete credit counseling/debtor education?

Sole proprietors must complete an approved credit counseling course before they file for bankruptcy in their own names. They must also take a second debtor education course after filing for bankruptcy. Owners of corporations, LLCs and other business entities generally are not subject to these requirements. We can determine if these steps are necessary for your small business.

Cost of filing Chapter 7 vs. Chapter 11

Both types of bankruptcy require you to pay filing fees, attorney fees and other costs. However, since Chapter 7 takes less time, it will ordinarily be less expensive than Chapter 11, especially in terms of attorney fees.

Take control of your finances and reclaim your life

From offices conveniently located in Athens, Scottdale, Douglasville, Marietta, Gainesville and Lawrenceville, Jeff Field & Associates represents clients throughout the Atlanta metropolitan area. To schedule an appointment, call us at 404-381-1278 or contact us online.