Can I File for Bankruptcy and Still Keep My Business?
If you’ve seen big companies file for bankruptcy and still stay in business, you might be wondering, “Can I file for bankruptcy and keep my business, too?” Most recently, Richard Branson’s Virgin Orbit filed for bankruptcy in the U.S. Bankruptcy Courts, and news reports indicate that the company is searching for a buyer while continuing to operate through the bankruptcy process.
So, what gives?
The key is that Virgin Orbit—and all of the other companies that have filed for bankruptcy while remaining in business—filed for bankruptcy under Chapter 11.
Chapter 11 Bankruptcy: Reducing Your Company’s Debt Obligations While Staying in Business
To understand how companies can stay in business after filing for bankruptcy, it is first important to understand that there are two main types of bankruptcies. While it is possible to file under several “Chapters” of the U.S. Bankruptcy Code, broadly speaking, all business bankruptcies are either: (i) “liquidation” bankruptcies or (ii) “reorganization” bankruptcies.
When pursuing a “liquidation” bankruptcy, companies will typically need to use their assets (or at least some of their assets) to pay off a portion of their debts. This, in turn, usually means that they go out of business. However, when going through a “reorganization” bankruptcy, the purpose of the process is to keep the company in business.
So, what is a reorganization bankruptcy?
In a reorganization bankruptcy, rather than liquidating its assets in order to pay its creditors, the business develops a payment plan that allows the business to pay its debts down over time. By “reorganizing” its debts through the bankruptcy process, the business is able to establish a reduced monthly payment obligation, and this allows the business to continue operating profitably without facing collection actions from its creditors.
For businesses, pursuing a reorganization bankruptcy typically involves filing under Chapter 11. However, going through a Chapter 11 bankruptcy can be relatively expensive—largely because the business’s creditors play a significant role in the process. From asserting claims to challenging the business’s proposed payment plan, creditors can slow down (and add cost to) the process in various ways.
Fortunately, Congress has recently established two new options that make filing for bankruptcy under Chapter 11 more viable for small businesses. These are: (i) filing for a streamlined bankruptcy under the Small Business Reorganization Act (SBRA); or (ii) pursuing a “small business case” under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Our small business bankruptcy page covers both of these options in detail. But here are some of the highlights:
- In a streamlined bankruptcy under Chapter 11 (also known as a “subchapter 5 bankruptcy”), the business does not have to file a disclosure statement, and creditors do not have the ability to submit competing payment plans. Additionally, while creditors have the right to approve the business’s final payment plan in a traditional Chapter 11 bankruptcy, in a small business case, the court will approve the plan as long as it is “fair and equitable.”
- In a subchapter 5 bankruptcy, the trustee’s role is simply to “facilitat[e] the development of and oversee the debtor’s plan of reorganization.” This is vastly different from a traditional Chapter 11 case and even a small business case under the BAPCPA, in which the trustee plays a much more active role in the process.
- In both subchapter 5 bankruptcies and small business cases under BAPCPA, the trustee’s and creditors’ limited involvement eliminates many of the potential roadblocks to plan confirmation. As a result, both of these options are usually significantly cheaper, and this means that they are viable options for many small businesses.
As a result, if your small business is struggling but you think you can turn things around with some financial breathing room, reorganizing your business’s debts under Chapter 11 could be the solution you need. By pursuing a subchapter 5 bankruptcy or a small business case, you may be able to develop a reorganization plan under Chapter 11 at a fraction of the cost of a traditional Chapter 11 bankruptcy proceeding.
Chapter 13: Another Option for Reorganizing Some Small Businesses’ Debts
For some small businesses, another option for seeking bankruptcy relief while staying in business is to file under Chapter 13. This option is available specifically to sole proprietors.
Chapter 13 is similar to Chapter 11 in that it offers the opportunity to reorganize a bankruptcy filer’s debts. However, while Chapter 11 applies to business entities, Chapter 13 applies to individuals. If you own a corporation or limited liability company (LLC), then you can’t file for protection under Chapter 13.
However, if you are a sole proprietor, you can. For purposes of determining Chapter 13 eligibility, the question isn’t whether you run a business but rather whether you operate through a business entity. So, if you have gone into debt as a sole proprietor, you can file under Chapter 13 to reorganize your business and personal debts.
How Do You Choose the Best Option to File for Bankruptcy and Stay in Business?
With multiple options available, it is important to make sure you choose the best option for your individual circumstances. So, how do you choose between the various options under Chapter 11 and the alternative option of filing under Chapter 13?
The simple answer is that you should discuss your options with a business bankruptcy lawyer. The decision you make is important—your reorganization plan will require you to make payments for anywhere from three to five years, and, if you choose the wrong option, you could still end up going out of business due to unmanageable debts. By working with an experienced lawyer, you can choose the option that makes the most sense for your business, and then you can move forward with confidence.
Get Started with a Free Business Bankruptcy Evaluation
Do you need to know more about pursuing a business bankruptcy? If so, we invite you to get in touch. Call 866-964-6529 or contact us online to schedule a free business bankruptcy evaluation.