October 2020 Newsletter: Exploring Bankruptcy: Understanding the options for a distressed commercial entity in a post COVID-19 economy

Part 1: Closing your Business v. Filing for Bankruptcy

Under high uncertainty, local economies are in various stages of reopening, yet many small businesses are considering permanently closing their doors, finding it difficult to overcome the financial and even emotional stress of maintaining a business for months in a closed economy. Before pulling the plug on your business, make sure to consider all your available options. Get familiar with your best course of action by learning the difference between filing for bankruptcy and closing your business. If you chose to file for bankruptcy, understand the process and know your best options through Chapter 7 and Chapter 11 of the Bankruptcy Code. If you choose to close business, know how to maximize your business value until the very end.

When a business closes, it enters a temporary dissolution period in order to fulfill all final obligations. Dissolution involves three steps: (1) A dissolution event, (2) The winding up of partnership affairs, and (3) The termination of a partnership. A dissolution event can occur by actions of the partners/partnership or by a partner filing for dissolution, which may then be granted by court decree. During dissolution, a business is still subject to certain duties and liabilities. It is important to identify what this means for your business. When your business is winding up, obligations and debts are still owed to the principle entity and those interested in its dissolution, such as investors, lenders, property lessors, and the IRS. When strategizing a plan to tackle your business debt, consider what outstanding receivables you may have, or other money owed to the business. Consider all obligations that are overdue or have no prospects of being paid and take action. What losses will your business have to absorb? Would assigning your accounts receivable to a financial institution yield sufficient capital to withstand your business obligations in dissolution? Your business should have sufficient capital to satisfy all financial obligations and have the resources to keep your business running for the remaining length of operation.

Bankruptcy is sometimes the better option when meeting financial obligations to creditors seems unrealistic. Suffering from lingering debt does not always equate to closing your business. If filing for bankruptcy is an attractive option for your business, learn the various filing options. While some options simply forgive certain debt, some provide a financial restructuring. If you choose to file for bankruptcy, consider what obligations would be discharged and what would you still have to owe. Various bankruptcy options can be available for your business if you qualify. Understand important requirements, such as having debt that does not exceed the maximum limit for a certain filing option.

Deciding to dissolve your business or formally file for bankruptcy is a difficult decision and will be best determined by evaluating your business obligations and debts. If you are able to satisfy your debts, uphold obligations, and support your business for a short period of time, you may be able to dissolve your business. However, if you are unable to come up with the capital to pay back your financial obligations, the bankruptcy process is your greatest tool. If bankruptcy seems like a good option for your business, look for our next article in the series as we explore the steps for filing for bankruptcy.

The SJS Law Firm can help you resolve this issue. For a complementary consultation, please contact us at (202) 505-5309.

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