Attorney Jon Ginter
Business Bankruptcy Issues
Most people who come to me about business bankruptcy issues do not understand that business bankruptcy is a lot different than personal bankruptcy, and is usually unhelpful or even undesirable. The main reason why business bankruptcy
is usually not helpful is that a Chapter 7 business bankruptcy does not result in a bankruptcy discharge. Yes, you read that last sentence correctly: A chapter 7 business bankruptcy does not result in a discharge, meaning it does not eliminate any of the debts of the business. Rather, the sole purpose of a Chapter 7 business bankruptcy is to “liquidate” the business, meaning to dump it off on the government so the government can deal with selling off all of the assets of the business and
paying off any creditors instead of you having to do it yourself.
The other problem that business owners face is that, to the extent that you as an individual signed personal guarantees for the debts of the business—which is almost always the case—then those debts aren’t going to get wiped out by a Chapter 7 business bankruptcy filing, either. If you signed personal guarantees like that then you’re going to have to look elsewhere for relief, such as a personal Chapter 7 or Chapter 13 bankruptcy filing.
There is another type of business bankruptcy called Chapter 11, but it is very complicated, expensive, time consuming, and rarely succeeds. Think $10,000 in attorney’s fees, minimum.
It is also exceedingly rare. To give you an idea of how rare, there were fewer than 30 Chapter 11 bankruptcies filed in all of Cleveland in the year 2012. Almost all of those filings were unsuccessful and were dismissed. In my opinion, Chapter 11 bankruptcy almost never makes sense unless we’re talking about a truly large business enterprise, and when I say that I mean not only millions of dollars in revenue per year but also steady profitability and a likelihood of improvement in the
near- to mid-term. If those conditions aren’t present then Chapter 11 probably doesn’t make sense and it is better to just shut the business down and start over.
Assuming Chapter 7 and Chapter 11 bankruptcies aren’t a good fit for your business, you should consider either a debt workout or dissolving the business. A debt workout is a negotiated agreement with your creditors where you typically pay only part of the money that you owe on a timeline that is affordable to you. Most reasonable creditors are willing to work with you on this basis because they understand that the other alternative is you shutting down the business and them getting nothing. However, debt workouts become increasingly difficult the more creditors you have, because each creditor requires a separate negotiation and it is difficult and expensive to get them all on board.
The other alternative, dissolving the business, means shutting the business down in an organized way that gives notice to creditors that the business is winding down and allows them to apply to receive any assets of the business to which they are entitled. Most of the time there are little or no assets so creditors do not apply for funds, and at the conclusion of the process the business no longer exists.