Small Business Bankruptcy and Reorganization

First of all, what is a small business? The SBA has a definition: companies with sales of up to $6 Million and construction companies up to $28.5 Million. 

To the average person that is not a small business. Also, many SBA “small businesses” are subsidiaries of big Corporations.

This article speaks to what the average person would consider a small business.

The ownership of a business or company is as follows:

  1. A Sole Proprietorship (including a married couple owning a business together.)
  2. A Partnership.
  3. A Corporation. I generally see LLCs (Limited Liability Corporations) and Sub Chapter S Corporations.

TYPES OF BANKRUPTCIES

  1. Chapter 7. Closing up shop and moving on. Chapter 7  is available to individuals, partnerships, and corporations;
  2. Chapter 13. Chapter 13 is the best plan of Reorganization. It is the lowest cost, simplest, and the most debtor-friendly plan. Only individuals and married couples can file Chapter 13;
  3. Chapter 11. Chapter 11 is a reorganization plan that is available to all. If a sole proprietorship, it is best to file Chapter 13.

CHAPTER 13 

For a sole Proprietorship Chapter 13 is the best way to reorganize a business. You remain in control of your business;

  1. Down payments to your lawyer is usually low;
  2. Cramdown debts to secured creditors. You pay the value of the asset rather than the contract balance;
  3. You have the option of giving back unwanted assets that you owe money. The secured debt becomes an unsecured debt;
  4. Tax debts (Income tax, payroll tax, and state taxes) can be paid over time;
  5. Payments to unsecured creditors can often be far less than you owe;
  6. You can assume (keep) or reject executory contracts: such as a lease;
  7. There are no quarterly payments to the US Trustee. Nor are there reports required in Chapter 11 cases.
  8. Only you (the Chapter 13 debtor) can propose a repayment plan.
  9. Payments go to a Chapter 13 trustee. The trustee disburses payments to creditors. There is only one monthly payment.  Bookkeeping is simplified. You are not sending out many checks to the many creditors.
  10. Chapter 13 plan can be extended to five (5) years. And that includes debts to the IRS or the State of Illinois.
  11. Chapter 13 plans can be confirmed in only a few months. You can focus on your business operations.

CHAPTER 11 FOR THE SMALL-BUSINESS DEBTOR

With the ending of the Pandemic, you may have opened your doors or would like to. Yet, you may be facing heavy debt burdens. To be successful, you have to deal with the debts. If you did not have debts, would your business thrive? Chapter 11, Subdivision V, can be the ideal solution for you.

The Small Business Reorganization Act (SBRA): Big Changes for Small Businesses

  1. It allows a corporation to reorganized similar to an Individuals Chapter 13;
  2. You remain in control of operations; you run your business;
  3. It is possible to “cram down” secured debts to the value of the asset; not the contract balance; the “cram down” option includes automobiles;
  4. You have the option of giving back unwanted assets that you owe money. The secured debt becomes an unsecured debt;
  5. You can reject unwanted leases;
  6. It is possible to reduce the amounts due to unsecured creditors. Even if you have to repay your debts 100%, most likely you will not have further pay interest;
  7. Tax debts (Income tax, payroll tax, and state taxes) can be paid over time;
  8. Upfront lawyer’s fees are more reasonable than a traditional Chapter 11;
  9. There are no Creditor Committees;
  10. Only you can propose a Repayment Plan; Creditors do not get to vote on a proposed plan;
  11. It is a streamlined process. You can be in and out of the Bankruptcy in a few months, as little as 90 days.
  12. The repayment plan will be three (3) to five (5) years.

HOW MUCH DO YOU HAVE TO PAY?

  • Secured Debt. Amortized over the repayment period. Interest will generally be less than contract interest;
  • Back Taxes. Repay for three (3) to five (5) years;
  • Unsecured creditors
    1. The greater of the liquidated value of the business; or,
    2. The difference between projected income and expenses.

The above is a simplified overview of SBRA. Your business is unique. Your Reorganization Plan will be tailored your needs and your situation.

TWO ELEPHANTS IN THE ROOM

Personal Guarantee- Individuals frequently have guaranteed a corporate debt.  Often corporate store or office leases require a personal guarantee.  Even if the corporation files Chapter 7, the person who guaranteed the debt may be stuck.

Leases- What if you are behind on your rent and want to reorganize and keep your current location? The Bankruptcy Code protects Landlords. If you want to assume a lease, the Bankruptcy Code says you have to pay all the back rent within no more than one year. (As an aside, you may have negotiating power before filing Reorganization. After all, if you file Chapter 7, they lose all their back rent, they have to evict you, they have to prepare the premises before looking for a new tenant, and they have to wait until the premises are rented again.) I have seen stores and restaurants that closed during the Pandemic, and they remain vacate today. 


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