Business Bankruptcy: When, How, and What Kind?

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By:Mike Cibik

Michael A. Cibik, Esq. writes a regular column titled “Understanding Bankruptcy” that appears in the Philly Record. This is that column.

Question: Business Bankruptcy: When, How, and What Kind?

If you own your own business, and that business is in trouble, or even just not doing as well as it once was, among the tools you should consider using is a business bankruptcy. If you want to continue to operate your business but restructure its debt, your options are Chapter 11, which is a business reorganization, and Chapter 13, which is a personal reorganization. (In contrast, Chapter 7 is a liquidation.)

How do you know which is the best choice?

Like any other bankruptcy topic, the answer depends on your situation. Factors that will go into determining which is the best option include how the business is organized (sole proprietorship, corporation, partnership), how much total debt the business owes, how much debt you personally have guaranteed for the business, and even how much personal debt you have. Your business assets, as well as your personal assets, may be a consideration. The most important factor of all may be how the company is doing, and what the prospects are for the future. Is the business on a downward slide, has it just hit rock bottom, or is it improving, but not fast enough to keep up with the demands of creditors?

There are some parameters that may make the choice easier. For example, if you have a corporation, and there is very little crossover between the corporate debt and your personal debt, Chapter 11 may be your only option.

On the other hand, if your business is unincorporated, or you’ve run it out of your back pocket, without a lot of separation between personal and business assets and liabilities, Chapter 13 may seem a better fit. But there are always circumstances that can turn a typical case on its head. The only way to make an informed decision is to consult an experienced bankruptcy lawyer and go through the process of examining both the legal issues, as well as the practical issues. Legal issues include things like debt limits, and how business debt is collateralized. Practical issues include whether you need financing to continue to operate and whether the value of your business is worth preserving given the cost of bankruptcy.

Next Week’s Question: Unemployed? Is Now The Time To File Bankruptcy?


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