Bankruptcy and Restructuring: Legal Options for Struggling Businesses

Small businesses are at the heart of the American economy, but rising costs, employment issues, and even natural disasters can all lead to tough choices for struggling businesses. Business owners may have their own assumptions about business bankruptcy and debt, but the truth is that often, bankruptcy and restructuring is the best choice to get a struggling business back on the right track.

Bankruptcy and Restructuring Options for Struggling Businesses

In a majority of cases, once a business owner makes their way to a bankruptcy attorney’s office, filing a petition for bankruptcy is going to be the best option to protect their company’s good will and relieve the pressure of debt collectors. However, to file or not to file is not the end of the question. Instead, you and your bankruptcy attorney will need to consider which bankruptcy and restructuring option is right for your company’s financial situation.

Conventional Chapter 11 Bankruptcy Reorganization

The most common bankruptcy solution for struggling business owners is a “conventional” Chapter 11 bankruptcy. This federal law allows you to recreate your business as a new legal entity with a new bank account and new vendor contracts, while acting as the “debtor in possession” to pay off creditors according to the Bankruptcy Code. Creditors’ collections efforts are halted by the automatic stay that applies in every bankruptcy case, giving the newly formed business time to pay debts according to a reorganization plan approved and overseen by the Office of the United States Trustee.

Small Business Chapter 11 Reorganization

Some companies, including corporations, partnerships, Limited Liability Companies (LLCs), and even some sole proprietors, can qualify for a small business Chapter 11 bankruptcy. This option is available to businesses that fit beneath the law’s debt ceiling, and allows the company to retain control over your company and its assets. Just like a Conventional Chapter 11 Bankruptcy, it allows you to create a reorganization plan to pay off debts under the supervision of the bankruptcy trustee. However, because the debts involved are more limited, the process is streamlined. A small business Chapter 11 case can extend the time you have to create a plan, and shield you from creditor interference during that period. This option has more restrictive deadlines, but can be a better option for companies facing financial uncertainty.

Subchapter V Chapter 11 Reorganization

Since 2019, there has been another option available to small business owners with less than $7.5 million total secured and unsecured debt (as of 2023) as long as half of that debt comes from business activities. In the Small Business Reorganization Act of 2019, Congress added Subchapter V to Chapter 11 of the bankruptcy statute. This Subchapter 5 reorganization does not require a disclosure statement. It also eliminates creditors’ ability to vote against confirmation of the plan, and reduces some supervisory costs. Because of this, a Subchapter V bankruptcy can be resolved more quickly than a Conventional Chapter 11 bankruptcy.

Chapter 7 Bankruptcy Liquidation for Businesses

An LLC or corporation can file a Chapter 7 bankruptcy in much the same way as a sole proprietor or individual. However, business entities are not entitled to the same discharge of unsecured debts. In a Chapter 7 business bankruptcy, the bankruptcy trustee has the authority to collect the company’s assets, pay the net balance of secured debts, and distribute whatever is left to the unsecured creditors or trade debts. Often these creditors receive only pennies on the dollar because the priority is placed on secured lenders, who are paid off first.

Should You Consider Non-Bankruptcy Options for Your Struggling Business?

Many business owners meet with their lawyer with preconceptions about how they will get their company out of debt. They may seek to avoid bankruptcy out of a fear of “losing everything” or being seen as a failure. However, the social stigma of bankruptcy is far less than most people expect, especially in the context of a business. Many of the most famous entrepreneurs in the country have at least one bankruptcy in their history.

That said, there is no “one size fits all” option for solving corporate debt. Part of an initial bankruptcy consultation is evaluating the company’s financial picture and the reasons behind the company’s insolvency. Most often, bankruptcy is the most effective cure by the time a business owner comes into a bankruptcy attorney’s office. However, your attorney should also help you consider non-bankruptcy options, comparing them to the relief you may receive through the bankruptcy courts.

Debt Negotiation

No one wants a loan to go into default – and that includes your creditors. Depending on your cash flow and financial resources, you may be able to negotiate the terms of your business loan, credit accounts, and other small business debts, even without the need of an attorney.

Under a Chapter 11 bankruptcy, debt negotiation becomes much more favorable to the debtor. Loans can be rewritten on more favorable terms and the principal balance and interest amounts can be reduced. The period of repayment can also be rewritten. Further, rather than handling debt negotiations with each creditor separately (and trying to keep your books balanced at the same time), you can work with the U.S. Trustee to establish a reorganization plan that covers all your unsecured debts while acknowledging the realities of your company’s income, expenses, and cash flow.

Asset Sales

Many small business owners hope that by “right-sizing” their company, they can avoid filing for bankruptcy. This can include asset sales, where the company liquidates valuable assets, inventory, and equipment to pay off their debts. In some rare cases, such as where the industry has shifted and that equipment is no longer relevant or necessary, these sales can be effective. However, bankruptcy can take the sale of your company’s assets much further.

Remember that, under a Chapter 7 bankruptcy, the trustee has the authority to liquidate your business assets and use the proceeds to satisfy your creditors. If you already intend to liquidate your assets, especially as part of winding down your business, a Chapter 7 liquidation can make the proceeds of that sale go further in satisfying your creditors. If you have filed a conventional Chapter 11 bankruptcy, business equipment can be sold free and clear of liens, or surrendered to creditors in satisfaction of the company’s debt. These transactions place a higher value on the equipment than if it was sold subject to the creditors’ liens, so the sale of the same assets goes further in bankruptcy than outside it.

Get Help from a Bankruptcy and Restructuring Law Firm

There are many options available to struggling businesses seeking relief from their debts in the bankruptcy courts. At Lawrence & Jurkiewicz, our bankruptcy attorneys are here to help people and businesses find meaningful debt relief. We can help small business owners resolve their corporate debts using the most up-to-date tools the Bankruptcy Code provides. We will meet with you to review your financial circumstances and help you decide which type of business bankruptcy is best for you, or whether yours is a rare case where another debt relief strategy is best. We want to help you make the right decisions for you and your business. Please call (860) 264-1551 or contact us for a consultation.

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