How to File Business Bankruptcy
June 20, 2024
When debts pile up and revenue isn’t enough to cover expenses, filing for bankruptcy is a viable, and sometimes the only, solution. This guide will walk you through the steps of filing for business bankruptcy, helping you understand your options and know what to expect.
Defining Bankruptcy
Bankruptcy is a legal process that helps individuals or businesses eliminate or repay debts under the protection of the federal bankruptcy court. The purpose of bankruptcy is to give a fresh start to honest debtors who are floundering financially.
For businesses, this could mean liquidating assets to pay off creditors or restructuring and creating a repayment plan. There are different types of bankruptcy filings, with the most common for businesses being Chapter 11 and Chapter 13.
Types of Bankruptcy for Businesses
Once you have decided to file for bankruptcy, you need to identify what type of bankruptcy will benefit your business the most. Businesses typically consider two main types of bankruptcy:
Chapter 11 Bankruptcy
Chapter 11 is often referred to as "reorganization bankruptcy." It allows businesses to continue operations while restructuring their debts. This type of bankruptcy is suitable for businesses with significant debts that need time to generate income and pay off their creditors.
Under Chapter 11, the business proposes a reorganization plan, which must be approved by the court and accepted by the creditors. It undergoes a detailed examination of its finances and operations. The court assigns a trustee to oversee the process and ensure compliance with the reorganization plan. The trustee has the authority to approve or reject significant business decisions.
The development of a reorganization plan is a key component of Chapter 11 bankruptcy. This plan must specify how the business will modify its operations and handle its debts in the future. It often includes negotiating new terms with creditors, scaling back operations to cut costs, and possibly selling off non-essential assets. The business might also seek new financing to support its restructuring efforts.
During the Chapter 11 bankruptcy process, businesses must maintain transparency and cooperation. Filing for Chapter 11 grants the business a "stay" that halts all collection actions from creditors, giving the company a much-needed respite. However, failure to comply with the court's requirements can result in dismissal of the bankruptcy case or conversion to a Chapter 7 liquidation.
One advantage of Chapter 11 is that it provides businesses with the opportunity to emerge stronger and more viable. Successful reorganization can lead to a more streamlined and profitable operation, ultimately benefiting the business, its employees, and its creditors. However, the process can be complex and costly, often requiring experienced legal and financial advisors to navigate effectively.
Chapter 13 Bankruptcy
Chapter 13, on the other hand, is designed for individuals and sole proprietors. It allows them to keep their assets while repaying debts over a three to five-year period. This type of bankruptcy is ideal for small business owners who have a consistent income and can commit to a repayment plan.
Under Chapter 13, the debtor must propose a repayment plan detailing how they will pay off their debts over the designated period. This plan should detail regular fixed payments to a trustee, who will then distribute them to creditors. The amount paid under the plan is typically based on the debtor's income, the value of their assets, and the total amount of their debts.
One notable advantage of Chapter 13 is that it allows debtors to keep their property, like their home or car, if they continue with their repayment plan. This is particularly beneficial for sole proprietors whose personal and business assets may be intertwined. Additionally, Chapter 13 can stop foreclosure proceedings and allow debtors to catch up on missed mortgage or car payments over time.
To qualify for Chapter 13, the debtor must have a regular income and total unsecured and secured debts within certain limits, which must be adjusted periodically to reflect consumer debt levels. Debtors must adhere to their payment schedule, as failure to pay can lead to dismissal of the bankruptcy case or conversion to Chapter 7 liquidation.
Ultimately, a successful Chapter 13 plan can help a small business owner regain financial stability, protect valuable assets, and avoid the more drastic measures of liquidation required by Chapter 7. It provides a pathway to resolve debts over time while maintaining control of personal and business properties.
Bankruptcy Laws in Florida and Georgia
While the federal bankruptcy code governs bankruptcy cases, each state has specific laws that affect how bankruptcy is handled locally.
Florida has exemptions that allow you to protect certain types of property from being liquidated in bankruptcy. For instance, the Florida Homestead Exemption allows homeowners to protect their primary residence, regardless of its value.
Georgia has its own set of exemptions, such as the Homestead Exemption that allows you to protect a portion of your home’s equity. Georgia also offers exemptions for personal property, wages, and retirement accounts.
It's important to understand the laws specific to your state to determine how your assets will be treated in bankruptcy. By consulting with a knowledgeable bankruptcy attorney in your state, you can make sure you take full advantage of these exemptions.
How to File for Business Bankruptcy
Consult with a bankruptcy attorney: A bankruptcy attorney will assess your situation, help determine if Chapter 11 or Chapter 13 is suitable for you and guide you through the process.
Prepare and file the petition: This includes providing detailed information to the court about your finances, assets, liabilities, and operations.
Automatic stay: Filing the petition triggers an automatic stay, stopping creditors from taking any collection actions against you.
Submit a repayment or reorganization plan: Your attorney will help you develop a detailed repayment plan (for Chapter 13) or a reorganization plan (for Chapter 11) outlining how you intend to repay your debts over three to five years.
Court approval: The court will review your plan and approve it if it meets all creditor requirements.
Make regular payments: Follow the plan and make payments to a trustee (Chapter 13) or according to the reorganization plan (Chapter 11). Regularly update the court and creditors on your progress.
Attend court hearings: You must attend various court hearings addressing motions, objections, and the progress of your plan.
Comply with reporting requirements: You must submit regular reports to the court, trustee, and creditors, detailing your financial status and adherence to the plan. These reports maintain transparency and trust throughout the bankruptcy process.
Address claims and objections: This may involve negotiating settlements or adjusting your plan to satisfy the concerns of your creditors or other stakeholders.
Seek additional financing if necessary: Some businesses may require additional financing to implement their plan. This could involve negotiating debtor-in-possession (DIP) financing for Chapter 11.
Negotiate with the Unsecured Creditors Committee (UCC): If a UCC has been formed (Chapter 11), you may need to negotiate with it to gain support for your plan.
Attend credit counseling: Before filing, you must complete a credit counseling course from an approved agency. Certification of completion will be required as part of your filing.
Provide detailed documentation: This includes tax returns, income statements, and a list of all assets and liabilities to maintain transparency and provide a clear picture of your financial situation.
Attend creditor meeting: After the filing, you will attend a 341 meeting with your creditors, where the trustee and creditors can ask questions about your financial status and plan.
Adjust your plan if necessary: Sometimes, your initial proposal might need adjustments to gain court approval or creditor agreement. Your attorney will assist in modifying and resubmitting the plan if required.
Regularly update your budget: Periodically review and update your budget to ensure ongoing compliance with the plan.
Pay post-filing administration fees: Failure to pay these fees can jeopardize the approval and continuation of your plan.
Maintain adequate insurance: This will protect assets like a home or vehicle. The loss of insured property can complicate your bankruptcy proceedings.
Be aware of potential plan modifications: A change in circumstances may require modifications to your plan. Being aware and flexible allows you to remain on track despite changes in income or unexpected expenses.
Understand the discharge process: After completing your plan, remaining eligible debts will be discharged, so knowing what to expect will help ensure a smooth conclusion to your bankruptcy.
Speak With a Bankruptcy Attorney in Tampa, Florida
Considering bankruptcy in Florida or Georgia? A good lawyer by your side can be invaluable as you go through this difficult process. The Law Offices of David K. Blazek, P.C., have years of experience guiding clients through Chapter 11 and Chapter 13 cases. When you hire David K. Blazek, you get the services of a knowledgeable, experienced, and dedicated lawyer who will stand by you from start to finish.
Ready to regain control of your financial future? Call David now.