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Bankruptcy for the small business owner

Many small business owners in Rockland County who are facing unexpected financial difficulties may wonder about the consequences of filing a bankruptcy petition. Perhaps the most important question is whether to seek dissolution under Chapter 7 or a reorganization under Chapter 11. The second question is what happens to the business and its assets in a Chapter 7 or Chapter 11 proceeding.

The form of organization used by the business can have a significant impact on whether the business owner can use Chapter 7. Chapter 7 is available for individual and cannot be used by corporations or limited liability companies. If a business is a sole proprietorship or partnership, i.e., neither a corporation nor an LLC, The owner may choose to file under Chapter 7. Filing under Chapter 7 essentially means that the owner is filing as an individual, which means that he or she must pass the so-called "means test" under Chapter 7. The means test forecloses Chapter 7 to anyone whose annual income exceeds the median income in the state whether the debtor files the petition. Under Chapter 7, the debtor's assets, including the assets of the business, are turned over to the bankruptcy trustee, who uses the assets to pay off the claims of creditors. Any claims not satisfied are discharged and do not need to be repaid. The business, in effect, ceases to exist.

Chapter 11 can be more complex because the Bankruptcy Code contains a special provision for small business debtors. A small business debtor is a business with total non-contingent liquid debts of less than $2,566,060. The court must also find that the creditors' committee has been insufficiently active and has failed to provide supervision of the debtor that is adequate to protect other creditors. The small business debtor must make periodic reports to the trustee by providing balance sheets, statements of operations, cash-flow statements and its most recently filed-tax return. The trustee will also exercise greater oversight of the debtor and its ability to file a plan of reorganization. Because extensions of various procedural deadlines are more difficult to obtain, a small business bankruptcy generally proceeds faster than a normal Chapter 11 case.

Any small business owner who is contemplating bankruptcy will benefit from consulting an experienced bankruptcy lawyer before making a final decision. A knowledgeable bankruptcy attorney can explain the differences between Chapter 7 and Chapter 11 and can provide advice on how the different chapters will affect the business.

Source: United States Courts, "Chapter 11 - Bankruptcy Basics: The Small Business Case and the Small Business Debtor," accessed on March 26, 2018

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