How Chapter 13 Bankruptcy Affects Business Owners

TRI Writer • January 6, 2020

Are you a small business owner filing for Chapter 13 bankruptcy ? Are you confused about how it will affect you and how you should prepare?

Do Bankruptcy Filers Who Own a Business Have to Close Their Business?

Business owners filing a Chapter 7 personal bankruptcy may need to shut down their business. Still, if the company is an LLC or corporation with additional owners, you may not need to close down shop even if you are personally liable for a large portion of the company’s debt.

Sole Proprietorship:

If you are the owner of a sole proprietorship, the bankruptcy trustee may require that you close the business when filing a personal Chapter 7 bankruptcy. They may need time to assess the value of the company, determine a likely sale price of any business assets in the bankruptcy estate, etc. This type of assessment generally takes at least two months. Requiring that you close the business also prevents you from incurring any additional liabilities during the bankruptcy case (regular business debts, potential legal claims against your business, etc.) Companies that operate with little to no assets like consultants, service providers, freelancers, etc. may be allowed to remain open during bankruptcy, especially if the risk of running up debt or liability is minimal. Although, even a small service business may be shut down by the trustee if they feel there are significant accounts receivable with the potential for collection. For example, a small real estate business with commissions that have not yet paid out will likely become part of the bankruptcy estate as will other proceeds the company generates while bankruptcy is in process.

Partnerships and Multimember LLCs:

If you are an owner in a business partnership or a multimember LLC, your share of the business will be part of your bankruptcy estate. However, unless you are a majority owner, most states prohibit the bankruptcy trustee from interfering with the business or taking any business assets. The possibility exists that the trustee could obtain a “charging order” against your interest in the company. The charging order acts as a lien against business interest that allows the trustee to receive any profit distributions you would generally receive as the owner of the interest. If the business does not regularly distribute profits to owners/members, it doesn’t do the trustee much good. The bankruptcy trustee could assign or sell the economic rights in your ownership interest to someone else, but they typically can’t transfer or sell your share of the partnership or LLC.

If you are a partner or member of an LLC, you might have signed a buy-sell agreement that requires termination of your ownership interest before filing bankruptcy. If this provision is in place and you violate it, you could risk facing a lawsuit from the co-owners. To assess the risks associated with this particular situation, consult an experienced small business attorney.

Corporations and Single-Member LLCs:

If you are the sole or majority owner of a corporation or LLC, your bankruptcy trustee can take over your shares or membership interest. The trustee can then vote to sell or liquidate the business and distribute the proceeds to the business’s creditors. Trustees generally take a cost/benefit approach when deciding to dissolve and liquidate. If the company has a moderate amount of debt and several valuable, nonexempt assets, the bankruptcy trustee is likely to dissolve the corporation or LLC to sell the assets.

Your personal bankruptcy may or may not affect your business if you own a viable corporation with other members. A business owner sharing equal ownership with other shareholders may file personal bankruptcy without bringing consequences down on the corporation, but it depends on the details.

The trustee has the right to vote shares in the corporation but won’t generally be able to force a dissolution unless the owner filing bankruptcy is the majority shareholder. The stock of the owner filing will still be part of the bankruptcy estate, but it doesn’t typically carry much value to the trustee unless one of the co-owners indicates they want to buy it.

If you own a business and you need information about how filing personal bankruptcy could affect your business, please don’t hesitate to get in touch with our experienced bankruptcy attorneys to discuss your options. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one in Chattanooga with two. You are in good hands with Kenneth C. Rannick P.C.

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Subchapter 5 Bankruptcy: Unlocking New Possibilities for Tennessee Residents

January 30, 2024
Are you a Tennessee resident facing financial challenges and considering bankruptcy? If so, you may have heard about a relatively new option called Subchapter 5 bankruptcy. But what exactly is Subchapter 5 and how does it differ from traditional Chapter 11 bankruptcy? More importantly, what benefits does it offer to individuals and small businesses?  In this blog post, we will explore the world of Subchapter 5 bankruptcy and shed light on its advantages for Tennessee residents. Whether you're a struggling entrepreneur or an individual burdened by overwhelming debt, understanding the potential benefits of Subchapter 5 can help you make informed decisions about your financial future. What is Subchapter 5 Bankruptcy? Subchapter 5 is a relatively recent addition to the United States Bankruptcy Code, specifically designed to provide a streamlined and cost-effective bankruptcy process for small businesses and individuals. It was created as part of the Small Business Reorganization Act (SBRA) in 2019, with the aim of increasing accessibility to Chapter 11 bankruptcy relief. The Benefits of Subchapter 5 Bankruptcy Simplified Process: One of the key advantages of Subchapter 5 is its simplified and faster bankruptcy process. Unlike traditional Chapter 11 bankruptcy, which can be complex and costly, Subchapter 5 offers a more streamlined approach that is better suited for small businesses and individuals. Retention of Ownership: Under Subchapter 5, business owners have the opportunity to retain ownership and control of their company while developing a repayment plan. This allows for greater flexibility and the ability to restructure debts without losing ownership interests. Reduced Plan Requirements: Subchapter 5 eliminates certain stringent plan requirements that are typically associated with traditional Chapter 11 bankruptcy. This simplification of the plan process makes it more accessible to small businesses and individuals. Debt Repayment Plan: Subchapter 5 allows for the development of a debt repayment plan based on the individual's or small business's disposable income. This plan spans over three to five years, making it more manageable and achievable for debtors. Creditor-Friendly Approach: Subchapter 5 encourages creditor participation and collaboration, promoting consensual resolutions and a more amicable environment. This can lead to increased cooperation, reduced litigation costs, and ultimately, a more successful restructuring process. Subchapter 5 vs. Chapter 11 Bankruptcy: Understanding the Difference While both Subchapter 5 bankruptcy and traditional Chapter 11 bankruptcy share some similarities, there are significant differences between the two. The primary distinction lies in the complexity, cost, and requirements associated with each option. Subchapter 5 offers a more simplified and accessible bankruptcy process specifically tailored to the needs of small businesses and individuals, while Chapter 11 is better suited for larger businesses with more complex financial structures. If you're a Tennessee resident grappling with financial difficulties, Subchapter 5 bankruptcy may provide a viable solution. Its streamlined process, reduced plan requirements, and debtor-friendly approach make it an attractive option for small businesses and individuals seeking relief from overwhelming debt. Before making any decisions, it's essential to consult with a qualified bankruptcy attorney who can guide you through the process and help determine the best course of action for your specific situation. Remember, bankruptcy is not a one-size-fits-all solution, and the outcome will depend on various factors. However, understanding the potential benefits of Subchapter 5 bankruptcy can empower you to make informed decisions about your financial future. At Kenneth C. Rannick, P.C., we specialize in bankruptcy law and can provide the guidance and support you need during challenging times. Contact us today to schedule a consultation and explore your options for a fresh start. Take control of your financial future with Subchapter 5 bankruptcy. Let us help you navigate the path to a brighter tomorrow.

A Comprehensive Guide to How Chapter 11 Bankruptcy Works in Minnesota

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Filing for bankruptcy can be a scary and confusing decision, but it is a necessary step for individuals and businesses who are struggling with their finances. In Minnesota, one of the most common types of bankruptcy is Chapter 11 bankruptcy, which allows a business to reorganize its debts and continue operating while paying off its creditors. If you're considering Chapter 11 bankruptcy, it's important to understand how it works and what benefits it can offer. In this post, we'll delve into the process of filing for Chapter 11 bankruptcy, highlight its advantages, and discuss how you can get started.  1. Understanding Chapter 11 Bankruptcy Chapter 11 bankruptcy is a form of bankruptcy that allows businesses to reorganize their debts while continuing to operate. The goal of this process is to give businesses a chance to become profitable again by restructuring their debt payments. During Chapter 11 bankruptcy, a business is protected from creditors by an automatic stay that prevents them from pursuing collection activities. The debtor then works with a bankruptcy court and creditors to create a repayment plan that will allow them to pay off their debts over time. 2. Benefits of Chapter 11 Bankruptcy There are several benefits to filing for Chapter 11 bankruptcy. One of the primary benefits is that it allows the debtor to maintain control of their business operations while repaying their debts. This means that the debtor can continue to generate revenue and will not be forced to liquidate their assets to pay off their creditors. Additionally, Chapter 11 bankruptcy can give the debtor more time to negotiate with their creditors and reach a repayment agreement that is more favorable to them. 3. How to File for Chapter 11 Bankruptcy Filing for Chapter 11 bankruptcy can be a complex and time-consuming process, but it is possible with the help of a knowledgeable bankruptcy attorney. The first step is to file a petition with the bankruptcy court, which will initiate the automatic stay and prevent creditors from taking any further collection actions. Next, the debtor will need to provide the court with a comprehensive list of their assets, liabilities, and creditors. From there, the debtor will work with their attorney to create a repayment plan that is feasible and fair to all parties involved. 4. Working with a Bankruptcy Attorney Filing for Chapter 11 bankruptcy can be an overwhelming process, and it is important to work with a qualified bankruptcy attorney who can guide you through the process. A bankruptcy attorney can help you prepare and file the necessary paperwork, negotiate with creditors on your behalf, and create a repayment plan that is tailored to your unique financial situation. Additionally, an attorney can give you advice on how to protect your assets and maintain control of your business operations during the bankruptcy process. Filing for Chapter 11 bankruptcy can be a complicated and stressful process, but it can also be a valuable tool for businesses that are struggling with their finances. By reorganizing their debts and negotiating with creditors, businesses can get a fresh start and work towards profitability once again. If you're considering filing for Chapter 11 bankruptcy in Minnesota, it's important to work with a qualified attorney who can guide you through the process and help you achieve the best outcome.
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