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Small Business Bankruptcy and You

You researched. You planned. You devoted every waking minute – and probably more than a few nightmares! – to launching your small business and then to keeping things running smoothly … and then the coronavirus pandemic hit Virginia in March 2020.  Coronavirus Bankruptcy

Suddenly, your restaurant’s dining room was shut down and you were forced to offer only takeout and delivery, cutting your income in half and forcing you to lay off employees.  The Governor’s Executive Order closed your dance studio and your customers stopped paying you because you weren’t running classes. But you persevered, thinking that your reserves would get you through the next few weeks, or a couple of months at most.

But here we are almost a year later, and the pandemic does not appear to be slowing down. There is some good news – frontline workers and some of Virginia’s elderly have been vaccinated – but everyone is still wearing masks and socially distancing. Public gatherings are limited to 10 people, so your classes and tables are less than half of what they were in early 2020. 

Worst of all, your cash reserves and any Paycheck Protection Program money you may have received are long gone. Your creditors are hounding your cell phone and your mailbox is full of bills. And with all of the talk about the “new normal,” perhaps you no longer see any light at the end of the tunnel for your business and are ready to throw in the towel. If so, perhaps a Chapter 7 bankruptcy is right for you.

Small Business Bankruptcy

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy

When you file a Chapter 7 bankruptcy – also often called a “straight” or “liquidation” bankruptcy – for your business, you get immediate relief from the never-ending phone calls and letters.  This protection is called the “automatic stay.” 

The Bankruptcy Court appoints someone called a Trustee to sell your business’s assets and pay off as much of your business’s debts as possible before dissolving the business. So in addition to the break you get from the automatic stay, you can hand over the reins of the business to the Trustee, finally take a deep breath, and perhaps even begin considering your next business venture.

Chapter 11 Bankruptcy

What if you’re not quite ready to give up? Or what if you have taken advantage of the recent downtime to envision a twist on your current business? Then a Chapter 11 bankruptcy may make more sense. You still get the protection of the automatic stay, but instead of relinquishing control of your business to a Trustee, you continue running it as a “debtor in possession.” 

You can take advantage of your newfound breathing room to negotiate new repayment terms with your creditors and restructure your finances. You do this by proposing a repayment plan that addresses all of your debts, and then your creditors are given time to vote and/or propose alternate arrangements. 

This works particularly well if you have had some new ideas on how to operate your business but need time to implement them. You may even be able to obtain special loans (“debtor in possession financing”) to improve your cash flow and get your business to the other side. And since there is no Trustee, you decide what to sell, if anything. 

Most business owners tell me that they don’t have anything worth selling, but they have forgotten about the big purchases that they financed before the pandemic. In Chapter 11 bankruptcy, equipment or inventory that you purchased on credit can be sold, and you can “cram down” the loan so you only pay back the value of what you have left.

Special Rules for Small Business Bankruptcy

If you have done any research on Chapter 11 bankruptcy, you are probably concerned that it is expensive and complicated. This is absolutely true. However, in February 2020, the Small Business Reorganization Act created a special subsection of Chapter 11 called Subchapter V just for small business owners.  

Subchapter V is significantly cheaper, faster, and more user-friendly than a traditional Chapter 11 bankruptcy because you get the protection of the automatic stay, you get to continue running your business as the “debtor in possession,” and you get that breathing room to negotiate with your creditors, but you completely avoid the time-consuming process of getting your creditors’ votes on your repayment plan. The bankruptcy judge just decides whether your proposal is fair and equitable. Anyone who has ever tried to negotiate with a landlord or credit card company can appreciate the time and sanity saved there! 

Originally, the Small Business Reorganization Act included small business owners with under $2.7 million in debt, but in March 2020, the CARES Act nearly tripled that limit to $7.5 million.  That increase expires on March 26, 2021, so if your business is struggling and you want to keep it operational while Virginia fights through this pandemic, you should contact me about a possible Subchapter V immediately.

What About Chapter 13 Bankruptcy?

Individuals, partnerships, limited liability companies, and corporations can all file for Chapter 7 bankruptcy or Chapter 11 bankruptcy (including Subchapter V), but only individuals can file a Chapter 13 bankruptcy. But if you are an individual who operates a sole proprietorship, a Chapter 13 may make sense for you.  

Like the other chapters of bankruptcy discussed above, you will receive the protection of the automatic stay. Like Chapter 11 bankruptcy and Subchapter V, you can continue running your sole proprietorship. But there are special rules in Chapter 13 bankruptcy that allow you to catch up on your personal mortgage, car loan, and back taxes while possibly reducing the amount you owe on credit cards, personal loans, and other unsecured debt. 

So, while Chapter 13 bankruptcy won’t wipe out your business debts, adjusting your personal debt might create enough room in your budget to allow you to keep your business afloat.

Personally Guaranteed Business Debts

Many business owners borrow money in their own names or cosign loans for their businesses. Unfortunately, this common practice can create significant problems if the business is struggling.  If you think you might have personally guaranteed a debt for your business, you may also need to consider filing an individual bankruptcy.  I can delve deeper into this with you.

Contact Dunlap Law

Want help with the small business bankruptcy process? Whether you are looking to get your sole proprietorship, partnership, limited liability company, or corporation through the coronavirus pandemic or you believe that your current business plan no longer fits into our “new normal,” Dunlap Law can help! Please get in touch with us.

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