Business Owners Dealing with Debt Issues

  • To establish debtor eligibility, one must ask themselves three questions: (1) is the debtor an individual or a business; (2) does the debtor meet the residency or contract requirements in the Bankruptcy Code?; (3) will the debtor qualify for a categorical exclusion that the Bankruptcy Court determines?
  • If wanting to file under chapter 7, if most of the debtor’s debts are non-consumer, then the debtor can qualify for chapter 7 regardless of the means test.
  • If wanting to file under chapter 11, there are no specific requirements, as it is primarily about reorganizing debt for individuals or businesses.
  • Business owners facing debt issues must first assess their eligibility for bankruptcy relief by considering three key questions. The first question is whether the debtor is an individual or a business, as this will influence which bankruptcy options are available. The second question involves meeting the residency or contract requirements outlined in the Bankruptcy Code. These requirements ensure that the debtor is within the appropriate jurisdiction for filing. Finally, the debtor must determine if they qualify for any categorical exclusions, which the bankruptcy court may apply based on specific circumstances, such as the nature or amount of debt.
  • For business owners interested in filing under Chapter 7, if the majority of their debts are non-consumer, they may qualify for this type of bankruptcy regardless of the means test, which typically assesses a debtor’s income to determine eligibility. On the other hand, Chapter 11 is designed primarily for reorganizing debts and is available to both individuals and businesses without specific eligibility requirements. This chapter provides an opportunity for the debtor to restructure their financial obligations while continuing operations. Both options are complex, and consulting with a bankruptcy attorney is often advisable to navigate the process effectively
  • Chapter 7 is straight liquidation and shutdown of the business, if applicable. The trustee gets appointed to handle assets. If the debtor is a business and wants to continue operating, chapter 7 is not a good option
  • Chapter 11 is good for reorganization. If the debtor has assets that could be sold and/or you have cash flow issues but want to keep running, chapter 11 might work.
  • Liquidation is like handing over the keys; the trustee decides what to do. Reorganization, on the other hand, keeps you in control—you stay in the driver’s seat and propose how debts will be addressed.
  • A business debtor absolutely must have an attorney. You can file pro se, but cases like Chapter 11 will likely be dismissed without legal representation. Even for individuals, Chapter 11 and Chapter 13 are too complicated to file alone
  • You stay in control, keep your assets, and propose a plan—whether to reorganize, sell, or wind down the business in an orderly way. You also avoid the abrupt shutdowns typical in Chapter 7.
  • It’s expensive and complicated, often requiring significant legal and financial work. For a very small business, the costs may outweigh the benefits.
  • Chapter 7 lets you shut down and move on. Someone else—the trustee—handles the mess, so you can focus on starting fresh.
  • You lose all control of the assets, including intangible ones like intellectual property. The trustee decides what to do, which can include selling assets to competitors.
  • If you personally guaranteed a business debt, it becomes your personal obligation. Even if the business files for bankruptcy, the personal guarantee remains, and creditors can still pursue you for that debt. You may have a defense based on the amount recovered from the business bankruptcy, but creditors can still push forward for the balance. Often, creditors wait to see how the bankruptcy case plays out before pursuing personal guarantees.
  • A small business debtor is defined under Subchapter V of Chapter 11, which simplifies bankruptcy for small businesses. This includes businesses with approximately $3 million or less in debt. Subchapter V removes many of the traditional requirements of Chapter 11, such as the absolute priority rule, and does not require creditor approval for a plan if the debtor commits all projected disposable income to the plan. This makes the process more accessible for small businesses.
  • The debtor, acting as a debtor-in-possession, controls the business unless the court appoints a trustee due to mismanagement or other issues.
  • Stop paying non-emergency bills like unsecured debts and use the funds to hire an attorney. Prioritize critical expenses like rent or utilities. If necessary, consider borrowing from family or other sources.
  • Yes, SBA loans can be discharged. However, if they’re secured by collateral, the lender will be entitled to the value of that collateral.
  • If you file Chapter 7, the business must close immediately. Chapter 11 allows the business to keep operating during the reorganization process.
  • The key difference lies in how assets and debts are treated. For businesses, Chapter 7 involves liquidation, where the trustee takes control and decides what happens to the assets. In Chapter 11, the business can continue operating under the debtor’s control as a debtor-in-possession, proposing plans for reorganization or asset sales. In consumer bankruptcy, such as Chapter 7 or Chapter 13, personal debts and exemptions are the focus, and the process does not involve running a business or handling commercial assets.
  • In Chapter 7, the trustee decides what happens to the assets—whether they are sold or abandoned. In Chapter 11, the debtor keeps control and can use assets as part of the reorganization, though certain sales require court approval.
  • If you want to shut down and move on, Chapter 7 can do that. If you want to preserve the business, Chapter 11 allows tools like reorganizing debt, selling the business free of liens, or cramming down certain debts.
  • Critical vendors are suppliers or service providers that are essential to the continued operation of a business during bankruptcy. In Chapter 11, debts existing before the bankruptcy filing are generally not paid immediately. However, for critical vendors, a motion can be filed with the court to request permission to pay these pre-petition debts. The court typically requires proof that failing to pay the vendor would harm all creditors, such as causing the business to shut down. Vendors providing services or goods post-petition are treated as administrative priority claims and are paid ahead of most pre-petition creditors.
  • Vendors providing goods or services post-petition, including invoices submitted after the bankruptcy filing and before the closing of a sale agreement, are generally treated as administrative priority claims. These claims are paid ahead of pre-petition creditors. However, their payment priority does not supersede secured creditors with first-position liens on the debtor’s assets, unless there is a specific carve-out agreement or court order ensuring payment of administrative claims.
  • Yes, a business can obtain new financing after filing a Chapter 11 petition, but it requires court approval. This is typically done through what’s called ‘DIP financing’ (Debtor-in-Possession financing). However, securing new financing is difficult, especially for businesses that have already filed for bankruptcy. The most likely source of financing is the first-position lender or related parties, such as equity owners, but it usually requires court approval to proceed. It is rare for external lenders to step in.
  • Accounts receivable factoring is when a business sells its receivables (money owed by customers) to a third party at a discount. The third party then collects the full amounts owed directly from the business’s customers. This is often done to get immediate cash flow. In bankruptcy, it can be a way to raise funds for the business quickly, although the terms of the factoring arrangement may be complicated, and it may affect the priority of creditor claims.
  • A Merchant Credit Advance is a type of loan where a business gets money upfront in exchange for a portion of future sales. It is typically repaid through a percentage of the business’s daily credit card receipts, meaning the repayment amount varies with the business’s sales.
  • To get out of a commercial lease, the tenant can reject the lease in bankruptcy. If rejected, the landlord can file an unsecured claim for the remaining lease term, subject to the cap under Section 502(b)(6) of the Bankruptcy Code. Finding a sub-tenant is often a good strategy to mitigate damages, as it reduces the landlord’s claim by the amount the sub-tenant pays. However, the landlord’s approval is typically required for subletting, depending on the terms of the lease. Without a sub-tenant, the landlord can claim the full remaining balance owed under the lease as damages, especially in states where landlords have no duty to mitigate damages.
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