Small Business Owner Struggling With Debt? Chapter 11 Might Be Your Answer

Submitted by Rachel R on Mon, 08/28/2017 - 10:35am

Small Business Owner Struggling With Debt? Chapter 11 Might Be Your Answer

Chapter 11 might help save your business

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Running a small business is a challenge, and on your journey from startup to lasting success, you might hit a speed bump. If your small business is struggling with debt, but you know there’s a better future ahead, Chapter 11 business bankruptcy might help you out. This form of bankruptcy allows you to restructure your debt so you can keep on operating your business and moving forward.

Business Bankruptcy

There is more than one type of business bankruptcy. Chapter 7 bankruptcy is a liquidation program. For sole proprietors, it wipes out business and personal debt. For a small business that is incorporated, Chapter 7 liquidates debt and unloads assets to settle the debt then writes off remaining balances so you can walk away from the business without any debt to plague you as you restart.

But if you want to keep your business open and just need some extra time to catch up on debt, depending on your business structure and whether (and how) it’s incorporated. Both Chapter 13 and Chapter 11 allow time to catch up on past-due balances on secured debt and offer relief on a percentage of unsecured debt. This might help you keep the doors open long enough to recover.

Why File Chapter 11 Bankruptcy?

Chapter 11 is used by businesses that range from small mom and pop shops all the way up to national corporations. The first reason to file Chapter 11 is that your business is struggling with debt it can’t afford. Sometimes a hiccup happens, and you are forced to take on added debt. From there, any roadblock in revenue or growth in expenses can make it impossible to service your debt.

Three things to consider when deciding whether to file Chapter 11 bankruptcy is how your business is structured regarding incorporation, how much debt you’re dealing with, and your future goals for your business. Chapter 11 is complex and costly, so it might not be a fit for your business. In some cases, Chapter 13 might be more affordable and still meet your needs.

Other Factors for Chapter 11

If your company is a corporation or LLC, you cannot file Chapter 13. To reorganize business debts, you’d have to use Chapter 11 instead. As a sole proprietor, you’ll have to use Chapter 13 if you want to keep the business open but need help with debt. However, if your debt is so great that you realize you can’t keep going, Chapter 7 liquidation can be used by both sole proprietors and corporations.

For companies involved in litigation as a defendant, or being threatened with litigation, Chapter 11 can stop the process. Debt collection efforts must stop as soon as your company files the case under what’s known as the automatic stay. However, you must have another reason to file Chapter 11 other than the litigation. If you file bankruptcy solely to avoid a judgment, your case can be thrown out of court.

But the underlying consideration is whether or not you can (or should) continue operating the business. A consultation with your accountant and a reputable North Carolina bankruptcy attorney experienced with Chapter 11 bankruptcy is recommended. They can assess your financial situation and let you know if Chapter 11 is an option or if you’d be better served by Chapter 7 liquidation and closing up shop.

Chapter 11 Can Keep Your Business Afloat

Although it’s a long and complex process, filing Chapter 11 could help turn your business around and get you back to profitability. In some cases, a business might file Chapter 11 and then decide it’s not working out and they can’t stay afloat. In this case, converting to Chapter 7 allows you to liquidate debt and walk away from the business with a clean slate.

To find out more about business and personal bankruptcy, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 now for a free consultation with a North Carolina bankruptcy expert at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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