10/16/2024
I frequently take calls from small business owners asking if I do bankruptcy for businesses. I will usually schedule a consultation. Most of the time we are going do discuss what personal liabilities the owners have and the implications and possibile bankruptcy options, or risk management and exemption planning for the owners.
There are only 2 types of bankruptcy for the business entity. Ch 11( including sub V ch 11) (Reorganization) and Ch 7 ( Liquidation).
Ch 11 is very expensive, a typical retainer is $10-20,000 and will be spent before the case is filed and the debtor will typically spend another $10-20,000 in professional fees in the next 30-90 days after the case is filed. This alone makes ch 11 unlikely for most small business. I do not do ch 11 filings. If a prospective client may benefit from ch 11 I will refer them to the very short list of ch 11 attorneys in Utah . In 2023 there were 6025 total bankruptcy cases filed in Utah, only 35 were ch 11 cases.
Ch 7 for a small business is rarely a good option.
1. Business do not get a discharge of debts in ch 7 like individuals do. An individual can file ch 7 and discharge/cancel debts and move on with a fresh start in life. If a business files ch 7 , it is a liquidation and the business needs to shut down and stop operating. However, any co-debtor/cosigner, personal guarantor of business debts will still be liable on the debt and can be collected from.
2. Filing ch 7 does not help a business save assets that are collateral for secured loans from the secured creditors. The creditors can quickly get relief form the court to continue foreclosure or repossession.
3. If a business files ch 7 the ch7 bankruptcy Trustee's primary objective will be to recover money and assets paid out or transferred to owners, management and insiders whether paid as draws, distribution or debt repayments . They can undo transaction over several years prior to the bankruptcy filing they can sue transfer receipients to get assets back or for money judgements. In most caes it is not in the best interests of business owners to open themselves up to the scrutiny of a ch 7 bankruptcy trustee for the business.
Many business owners tell me they don't think they have personal liability for any business debts. After all they are in a Limited Liability Company. Most of the time they are wrong.
Sba loans typically require a personal guaraatee from owners owning 20% or more of a business. EIDL loans are an exception and only required personal guarantees on loans above $ 200,000. Most leases have personal guarantees. Credit cards in the business name typically have personal guarnatees. Merchant Cash Advance loans and other business hardmoney, short term loans typically have personal guarantees. Most construction suppliers get personal guarantees when the business opens an account ( or the account is still under the owner's name from when they were a sole proprietorship) . Most vehicle and equipment financing /leasing has a personal guarantee.
So yes , I will provide a consultation about a failing business, but you as the owner are going to be the focus and our primary concern. I will help you evaluate your risk exposure, including what assets are at risk, and what can be protected in bankruptcy. I will advise you on issues that may jeopardize your opportunity for a bankruptcy fresh start . You may not ever file bankruptcy, but you can make better decisions and be better prepared in case you need a fresh start. In the meantime we can help you plan for and move forward to tomorrow.
