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

Nov 16, 2020

Part 2: Filing for Bankruptcy
You have considered your options and determined that filing for bankruptcy will allow you the greatest relief for lingering business debts. There are various options when it comes to filing for bankruptcy, and you should consider them carefully. What options does your business qualify for, and what options will provide the best financial relief? Before leaping to file for bankruptcy, mitigate the debt you can re-pay. Consider creating an initial scheduled repayment plan and liquidating non-essential assets. Once you have exhausted your resources, it may be time to begin the filing process.

If you are initiating the bankruptcy, understand all of your options. Look to your state insolvency laws, federal options, and informal out-of-court workouts. In general, an out-of-court workout is a plan for creditors that can be more attractive than filing for bankruptcy. However, beware that this may not be an option for your secured creditors. You may consider this option to satisfy at least some of your business obligations before turning to the court.

What state insolvency laws apply to your business? In other words, if your business is unable to pay its debts, what actions can creditor’s legally take under state law? Creditors may initiate bankruptcy, so you should be vigilant and punctually respond. Creditors generally start an “involuntary bankruptcy” if a business has the resources to pay creditor debts yet has not done so. Be proactive about feasible repayments to avoid this conflict.

Under Federal law, your business might have some options. Does your business qualify for relief under Chapter 7 or Chapter 11 of the federal bankruptcy code? If you meet the requirements of Chapter 7, liquidate assets and unsecured financial obligations will be forgiven. Even if your business does not fit the specific low-income requirements to file for Chapter 7, Chapter 11 might prove to be a better option.

Chapter 11 calls for the reorganization of a corporation or partnership to keep a business running and provide a feasibly structured repayment plan for creditors. Filing under Chapter 11 of the federal bankruptcy code might be more straightforward and less expensive for business owners who would like a chance to continue their business venture.

If your business entity is a Limited Liability Corporation (LLC), you might have special concerns to consider before filing for bankruptcy. Do you have a partner? Is there an operating agreement and are there any limitations relating to filing for bankruptcy? In some cases, filing may cause the business to dissolve. You much determine which partner is liable for which partnership debts, if any, and identify what exposed assets to creditors. Address crucial aspects of your business that will be integrated into the filing process.

Be prepared to understand all obligations that are not dischargeable when you file if you are in a permanent financial situation and are ready to declare bankruptcy formally. Some debts will not be liquidated through the bankruptcy process, such as taxes on the federal, state, and local. The court may also deny discharging debts where proper documentation is not provided, or the court finds that a bankruptcy law was violated.

When your business is ready to file for bankruptcy, you will file a petition with a Federal Bankruptcy Court in your state and district where your business is located. For a Chapter 7 case, the filing fee is $335. Chapter 11 cases start at $1,717, however, this may increase since the process is a bit more complex. Every business that goes through the bankruptcy process is analyzed under a microscope. The court will need a complete and accurate disclosure of your business operations and financial history. Be prepared to have at least two years of financial statements at the court’s request. An essential consideration for this process is whether to seek counsel.

Although you have the option to file for bankruptcy without an attorney, it is strongly encouraged since the process will lead to a long-term financial result. If you would like to learn more about whether to file under Chapter 7 or Chapter 11, look for our next article in the series as we compare the two options.

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

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