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For some small business owners, watching a larger colleague’s bankruptcy do little to allay fears about their own solvency.
As the coronavirus pandemic continues to weigh on the economy, Ruby Tuesday is the youngest major restaurant chain to seek protection under the US bankruptcy code. While many of its restaurants are closing, others remain open as the company restructures its business. Meanwhile, California Pizza Kitchen has announced its Bankruptcy filing has now canceled its planned auction in July after no bidders came forward and is handing over the property to its lenders, according to published reports.
While restaurants may have struck more than some other industries during the pandemic due to previous closings and reopenings with limited capacity in most places, other companies are not immune to the effects of the current economic downturn.
Of course, not only large companies can file for bankruptcy. And that avenue isn’t the only option for a troubled company – for example, a company could simply liquidate if it has little or no debt and wealth.
However, those with obligations that are no longer manageable may find that bankruptcy is the best way to move forward.
Chapter 11 vs. Chapter 7
First, a new Chapter 11 option may be appropriate if you expect your business to remain profitable over the long term but now needs to be relieved from the creditors. This avenue allows a company to stay operational and generally renegotiate and repay its debt over a set period of time, as well as take other steps to return to profitability.
This route, known as Sub-Chapter 5, which went into effect in February, applies to companies with debt below a certain threshold (with some restrictions). From now through next March, that cap is around $ 7.5 million. (Recently passed laws increased it by $ 2.7 million for a year.)
This option is designed to make the bankruptcy process faster and cheaper for small businesses. It eliminates some cost and paperwork requirements, and allows owners to keep their interest in the business, unlike typical cases in Chapter 11, among other things.
Even so, filing in Sub-Chapter 5 still comes at a heavy price: about $ 10,000 to $ 50,000 depending on the complexity of the case, said Stuart Gold, managing partner at Gold, Lange & Majoros in Southfield, Michigan. The registration fee itself is $ 1,717.
However, before you get down to filing, you should check with a bankruptcy practitioner to see if this is your best bet.
“You want to make sure that you have a viable business that can survive and that needs relief to justify the fees,” Gold said.
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In a Chapter 7 bankruptcy, a trustee will liquidate the applicant’s assets and attempt to pay off the creditors.
While this is a common avenue for individuals, it may not be appropriate for a business because it doesn’t clear the company’s debt, said Cara O’Neill, legal editor at Nolo.com and bankruptcy and litigation attorney in Roseville, California.
“Most business owners seek to get out of their liability for business debt first and foremost, and this is better done with a personal filing in Chapter 7 or Chapter 13,” said O’Neill.
Even if your business is a legal entity in its own right and kept separate from your personal finances, owners who have provided a personal guarantee for their business debt will still be on the hook if the business goes bankrupt.
In this case there is an opportunity to potentially prevent your personal assets from being seized – i.e. H. Your house, your car, your savings, etc – in filing for bankruptcy as well.
“It happens all the time,” said Charles Bullock, bankruptcy attorney and founder of Stevenson & Bullock in Southfield, Michigan.
“It could be a midsize company where the group of owners has been forced to guarantee debt, or it could be a single owner where the debt is overwhelming,” Bullock said. “We will see both the individual and the company file for bankruptcy to get a fresh start or [stop] Debt collection. “
Submission as an individual
Most individuals filing under either Chapter 7 or 13 and having a filing fee of a few hundred dollars and soliciting an attorney can add up to $ 1,200 to about $ 3,500 depending on where you live and the complexity of your case.
Both methods stop debt collection activities such as phone calls from creditors or debt collection agencies, garnishments of wages, and possibly lawsuits from creditors. (Court rulings that are already in place are more difficult to clear, as are some other types of debt, including student loans.)
However, there are differences in who is qualified and how debt is treated with each option. Chapter 7 is generally aimed at those who lack the income to repay their debts and who have few wealth. This is also the most common method of filing for bankruptcy.
This approach quickly clears many forms of debt, including credit cards, medical bills, personal loans, and possibly these personal guarantees. However, it doesn’t necessarily prevent your car from being repossessed or prevent your home from being foreclosed.
Typically, in Chapter 13, you have three to five years to repay certain debts and acquire the asset, such as To keep a house or a car. It also prevents creditors from garnishing your wages or collecting a levy on your bank account. This sign-up option requires you to have an income and your debt (both secured and unsecured) to be less than a certain amount (approximately $ 1.6 million total).
For those with debt above this threshold, Chapter 11 may be the best choice. This is the least common option for individuals.