Bankruptcy laws have been around for many years but unless you have been through the process, you may have unwarranted preconceived notions based on second-hand information. However, when businesses are in financial straits, bankruptcy may be an option to consider. In this article, our bankruptcy attorneys explain filing types that may be an option for your business.¹
Who Files for Bankruptcy?
Both individuals and businesses can file bankruptcies. To put it in perspective, let’s look at the breakdown of the number of bankruptcy cases as “business v. non-business” filed during 2019 and 2020.²
From the nationwide caseload, businesses primarily file 1 of 3 types of bankruptcy³ – chapter 7, chapter 11, or chapter 13:
|Type of Case||Business Cases||Non-Business Cases|
Source: United States Courts, Caseload Statistics Data Table
Chapter 7 Bankruptcy
This type of bankruptcy is straight liquidation for businesses that will no longer be operating. Chapter 7 has the lowest filing fee paid to the Court and a trustee is appointed to liquidate the assets, make distributions to creditors, and provide a final accounting.
Who Can File for Chapter 7?
Chapter 7 can be filed by business individuals (sole proprietors and individuals whose business debts make up more than half of their total debt) and business entities. Business individuals can receive a discharge of debts, but business entities do not. Even though business entities will not receive a discharge of debts, Chapter 7 serves as an orderly vehicle for liquidating assets and paying as many debts as possible as well as a means to prevent a race to the courthouse.
Under the protection of the bankruptcy court, smaller creditors may be treated more favorably than if the business was simply abandoned. Even though the business entity will no longer exist, the appointed trustee will sell the marketable assets such as the business name, customer lists, goodwill, and inventory.
The business individual that conducts business under his own name, like a consultant, writer, lawyer, or accountant, the individual will not be required to stop using his skills on a freelance basis and can create a similar business.
Chapter 11 Bankruptcy
Chapter 11 is the type of case that most people associate with the term “business bankruptcy”.
Even though Chapter 11 is utilized by business entities, it is also utilized by individuals that are over Chapter 13 limits. While other cases have appointed a trustee to oversee the case, Chapter 11 cases generally do not and the debtor acts as the “debtor-in-possession” completing the reporting requirements that are otherwise tasked to trustees.
For example, the debtor files a monthly operating report so that creditors, the United States Trustee’s Office, and the Court have financial oversight of the business operations during the bankruptcy process.
The Purpose of Chapter 11
Chapter 11 allows debtors to restructure their debts and continue operations of its business. The debtor continues the day-to-day operations but does have to seek Court approval for out of the ordinary course items such as selling real estate.
Through the bankruptcy process, the debtor will propose a plan to repay creditors which the creditors can vote to accept or reject. Even if the plan is rejected by the majority of creditors, the debtor can request the Court to approve the plan despite the rejection as long as at least one impaired class has voted to accept the plan.
What is a ‘class’ and how does it apply to filing for Chapter 11?
A class is a group of creditors that are similar in nature. For example, all unsecured creditors would be considered a “general unsecured class.”
An impaired class is a class that rights are being changed. Again, using unsecured creditors as an example, the general unsecured class is likely to be impaired because they generally do not receive the full amount they are owed, do not receive their contractual interest rate, and may not receive payments in the timeframe listed in the contract.
Once a plan is approved by the Court, the debtor will begin the process of making payments to creditors and remains under the supervision of the Court until the case is closed.
Chapter 11 also has options for small businesses that make the process more affordable and easier to navigate. There are requirements and important implications to be considered a small business but is worth inquiring about.
Chapter 13 Bankruptcy
This type of bankruptcy is limited for businesses because it is only available for business individuals. Business entities such as corporations and partnerships cannot file Chapter 13. Chapter 13 reorganizes the debt of a business individual over a period of three to five years reliant upon the individual’s ability to repay creditors.
A trustee is appointed to collect and oversee repayment of creditors for the entire duration. The amount of the payments is determined by a “means test” and consists of all of the business individual’s disposable income which includes any tax refunds received during the plan duration.
Chapter 13 cases have a debt limit of $250,000.00 of noncontingent, liquidated, unsecured debt and $750,000.00 of noncontingent, liquidated, secured debtor. If the business individual’s debts are over the limits, the individual will need to file a Chapter 11.
Filing for Commercial Bankruptcy
Business bankruptcy can be a helpful tool to enable businesses to reorganize and refocus. If your business is not as financially stable as you would like, consult an experienced commercial bankruptcy attorney to discuss your options.
Our Florida bankruptcy lawyers can help you understand your options to file for bankruptcy. The attorneys at Jennis Morse Etlinger are known for their experience and integrity. If you need legal help with commercial bankruptcy, contact our top-rated law firm today.
¹ This article does not provide any legal advice as to which type of bankruptcy may be the best option for your business. Competent legal counsel should be consulted to make that determination.
² The time period is the 12-month period ending June 30, 2020, as listed in the published statistical data reported at U.S. Bankruptcy Courts – Business and Nonbusiness Cases filed, by Chapter of the Bankruptcy Code, Table F-2,
³ While the table labeled (other chapters) as “Chapter 12,” this category can include Chapter 9 or Chapter 15. Chapter 9 is essentially for municipalities and 15 is for businesses or individuals who file bankruptcy in another country but have assets in the United States as well. Chapters 9 and 15 will not be discussed further in this article.
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