Here’s what entrepreneurs should know before declaring bankruptcy
Several moons ago, I was a practicing bankruptcy lawyer. One thing I learned at the time is that nobody wants or intends to file for bankruptcy.
But I also learned that under the right circumstances bankruptcy can be a lifeline. Perhaps this is why, although I have never received an acknowledgment from a client in dispute, I have received many from bankrupt clients.
I’m getting a lot of bankruptcy questions right now, so let’s demystify the process.
Question: What is bankruptcy?
Reply: Bankruptcy is a federal legal process that allows individuals and businesses to write off or restructure their debt, depending on the circumstances and the type of bankruptcy filed.
Q. OK, so what types of bankruptcy are there?
A: Essentially, there are three different types of BK (as we call lawyers): Chapter 7, Chapter 13, and Chapter 11 (these are different chapters of the bankruptcy code.)
Chapter 7 clears all unsecured debt – things like credit card debt, unsecured loans, etc. For someone with high debt, little income, and not a lot of assets, Chapter 7 may make sense.
But note that for a business, a Chapter 7 is also called a “liquidation”, and there is a reason for this: the bankruptcy trustee (the federal agent who oversees the case) will close the business and liquidate the assets of the business. the business to pay repay debts as far as possible.
A Chapter 13 is aimed at individuals (and not companies) who, for various reasons, cannot file a Chapter 7. This is a restructuring plan where generally, only part of the debt must be repaid. over a period of several years.
Chapter 11 is called a “reorganization” and is aimed at corporations.
Q: So what’s the right choice?
A: If you have not incorporated, you are personally liable for the debts of the business and you must file a Chapter 7 or Chapter 13. Chapter 7 often makes sense for sole proprietors and freelancers who are in the business. water and whose company is not distinct from the individual, legally speaking. Likewise, if you are a homeowner solopreneur, you can file a Chapter 7 or 13 and probably keep it (if you have too much equity, a Chapter 13 would be your best bet.)
Q: When does Chapter 11 make sense?
A: Chapter 11 is good for businesses that generate income but for some reason (eg coronavirus) are not doing enough to cover the expenses. Here, the company and its creditors would agree on a reorganization and repayment plan. (Note, the new subchapter V of Chapter 11 makes it easier for small businesses to get approval for their reorganization plans.)
Q: Will you lose any property if you file a return?
A: Although bankruptcy is governed by federal law, each state has a set of laws regarding the amount of property an individual is allowed to keep in a BK. These are called “exemptions”. Typically, in a Chapter 7, home equity up to a certain amount (say $ 50,000) is exempt, as are personal items like cars and appliances. During a liquidation, most of the company’s assets do not fall under the exemption rules.
Q: What are the disadvantages of bankruptcy?
A: You might be concerned that there is a stigma attached to filing, but don’t worry; it is much less nowadays. Second, you and your business will be under the control of the trustee and your creditors. Second, bankruptcy may not erase all of your debts. Finally, bankruptcies stay on your credit report for 10 years (although credit can often be significantly repaired within a few years.)
Q: How much will BK cost?
A: There are two costs involved: 1) Court filing fees and 2) Lawyer fees (natch!) Currently it costs $ 335 to file Chapter 7, $ 310 for a Chapter 13 and 1,717 $ for Chapter 11. run from a few hundred to a few thousand dollars.
Q: Can you make your BK yourself?
A: You can, but you shouldn’t; Too much is at stake and too much could go wrong if you make a mistake.
The good news is, yes, there is life after bankruptcy.
Steve Strauss is a lawyer, popular speaker and bestselling author of 17 books, including “The Small Business Bible. “You can read more about Steve at MrAllBiz.com, get more advice on his site The Independents, and connect with him on Twitter @SteveStrauss and on Facebook at The Independents.