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Bankruptcy is not a fun topic to discuss, but it is necessary for you to understand what it is and how it will work to the benefit of your business if you are considering filing. If you have a small business that is struggling financially, and you do not have enough resources to pay your creditors, bankruptcy may be an option for you to consider.

The most common types of bankruptcy filed by small businesses are Chapter 7, 11 and 13. Each type of bankruptcy will have a different, either positive or negative, impact on your business. Sometimes choosing Chapter 11 bankruptcy will have a significant and positive impact on your business.

Deciding when to file for bankruptcy is a harsh and troubling time. You should contact an experienced Chapter 11 bankruptcy attorney prior to filing for any type of bankruptcy to ensure it is in your best interests, and, of course, your best option.

Factors to Consider When Debating Chapter 11 for Your Small Business

Traditionally, small businesses refrain from filing for Chapter 11 bankruptcy since it is time-consuming, complex, and expensive. But it is important to note, Chapter 11 bankruptcy stands out amongst the other bankruptcy actions for partnerships, limited liability companies, and corporations, since the business can continue in operation if it is seeking to be restructured. It also grants small businesses additional time, 180 days, to file a reorganization plan and to renegotiate terms with creditors.

Chapter 11 bankruptcy permits a debtor to restructure its finances through a plan of reorganization that is subject to the bankruptcy court’s approval. The restructuring permits the debtor to reduce obligations, modify terms of payment and assists the debtor in balancing its income and expenses. This, in turn, permits the debtor to regain some form for profitability while continuing in operation. Reorganization also permits the debtor to sell assets or downsize the business, if necessary, to assist in settling outstanding debts.

What Is Considered a Small Business?

The Small Business Administration sets forth a broad definition of small businesses. Depending on the industry in which a business is engaged, whether it has 50 or 1,500 employees, it can still be considered a small business. According to the U.S. Bankruptcy Code, a “small business debtor” is a business with total debts of $2 million or less.

It is important to note that, when you file for Chapter 11 bankruptcy, the court requires that you comply with a special filing requirement. The court requires small businesses to file:

•       A copy of the business entity’s most recent balance sheet
•       A statement of operations
•       A cash-flow statement
•       A copy of the most recent federal income tax return

This requirement grants the bankruptcy court great oversight over Chapter 11 cases filed by small businesses that is not available in other types of bankruptcy proceedings.

As noted earlier, Chapter 11 bankruptcies can cost a substantial amount of legal fees and it may not be wise for struggling businesses to pursue it. In fact, Chapter 11 bankruptcies often get dismissed and converted to Chapter 7 because the business has little to no chance of turning over a profit. But, if the reorganization of the business proves to be successful, the costs of legal fees will be worth it.

Consult a Bankruptcy Attorney

In any bankruptcy situation, you should consider speaking with an experienced bankruptcy lawyer, who will evaluate your case, advise you of your liabilities, and suggest the best course of action. Call a law firm today.