By Stephen Behrends, May 3 2020 09:48PM
A recent New York Times article discusses this important question:
Experts and small business advocacy groups worry that tens of thousands of small business will be lost in the coming years due to the Coronavirus crisis. Many of them will consider and may be saved by filing bankruptcy. But there are the big questions: When do they need to start to think about it, which chapter of bankruptcy would be best and would the owners as well as the business have to file.
Everyone agrees that a clear sign that the company should consider filing bankruptcy or shutting the doors is an inability to pay the payroll taxes to the state or the IRS. The owners will be personally liable if the payroll taxes are not paid and it also is a definite indication that the business is not generating enough cash flow to cover the ongoing expenses.
Chapter 7 can be filed when it is time to give up or when the owners have no non-exempt assets. But a Chapter 13 or Chapter 11 is needed if there are non-exempt assets to be protected or the business can be reorganized.
Chapter 11 has recently been improved with the addition of Sub-Chapter V (5), which streamlines the Chapter 11 process and makes it easier for the Bankruptcy Court to approve a plan which is not supported by the creditors. Corporations, LLC, partnerships and joint ventures can only reorganize through Chapter 11, so the addition of the sub-chapter 5 is a big deal. Before it came along, there was only regular Chapter 11, which is big, clumsy and expensive, or the sale of the assets of a small corporation owned by an individual or couple, to the owners who then file Ch 13.
If the owners of the company have personally guaranteed the buisness debt, they may end up having to file bankruptcy, whether or not the company has to file. A bankruptcy for the company doesn’t automatically protect the owners. And a bankruptcy isn’t automatically required just because the business is going to be shut down. Sometimes, it is possible to reorganize the business in bankruptcy so that the debt that is personally guaranteed or the payroll taxes for which the owners will be personally liable can be paid.
A business reorganization is essentially a new business and so a new business plan and budget are crucial. Can the reorganized business generate the income needed to survive, even if its debt is restructured? If not, a Chapter 7 bankruptcy may be considered.
An experienced bankruptcy attorney can help sort out all of the questions about whether to file, who should consider filing and which chapter would work best.