Small business owners are a breed unto themselves. They eat, sleep, dream, breathe and live their businesses 24/7, 365 days/year. Sadly, a very high percentage of them fail. According to the Small Business Administration, at least 30 percent of new businesses fail during their first two years, and up to 50 percent fail during their first five years.
When a small business fails, a bankruptcy filing often follows.
This post will discuss the unique circumstances your Denver metro small business might be facing. We will also review options to seek bankruptcy protection if you can’t service your business debt.
When Is the Right Time to Consider Small Business Bankruptcy?
Small businesses face many tough challenges. Access to credit, high startup costs, limited ability to pay for top-notch staff and competition from legacy competitors combine to make the going tough for just about any new business.
Often, small business owners rely on personal credit to build their business. Over time, savings can dwindle and debts can skyrocket as the business owner seeks to use personal resources to cover operating costs.
In some cases, small business owners might choose high-rate sources of funding such as factoring loans or venture capital investment. These often make the debt situation worse. Before they know it, the business owner owes more than they make, and they contact me to talk about a possible small business bankruptcy filing.
The purpose of a small business bankruptcy filing is to help the business (and the business owner) wipe out or repay most or all debts.
Two types of small business bankruptcy exist:
- Sole Proprietorship Bankruptcy — Sole proprietorships are businesses which are legal extensions of the business owner. The owner is held responsible for all of the assets and debts of the business. Examples might include a lawyer, a child care provider, a hair stylist or any other individual working alone in their business. A sole proprietorship can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy.
- Corporation and Partnership Bankruptcy — These are legal entities that are separate from their individual owners. In these cases, Chapter 13 bankruptcy is not an option. However, both Chapter 7 and Chapter 11 bankruptcy remain viable options.
Let’s discuss these in a little more detail.
Chapter 7 Small Business Bankruptcy Filing
A Chapter 7 business bankruptcy filing might be the recommended course of action if and when the small business simply can’t survive.
The intended outcome typically will be to eliminate all or most of the company’s debts when the business does not make enough money to service those debts.
Businesses with little or no assets or income and/or high debts are good candidates for a Chapter 7 bankruptcy filing.
In these cases, the business typically will be dissolved as part of the bankruptcy process.
Chapter 11 Business Reorganization Filing
A Chapter 11 business reorganization filing might be better suited to small businesses that have the ability to make income but simply need more time.
In these cases, Chapter 11 gives a small business the time and opportunity to reorganize its structure and finances while continuing to operate. The owner of the business will be required to file a reorganization plan with the court to explain its plan for dealing with creditors and debts. The business’s creditors will be allowed to cast a vote on the business owner’s plan.
Once the vote is tallied, the court will review it and determine whether it believes the plan is fair and feasible.
Once approved by the court, the business must proceed with its reorganization plan and maintain all negotiated payment schedules.
Chapter 13 Personal Bankruptcy Filing
A Chapter 13 bankruptcy filing might be the best (or only) option for certain small businesses. In these cases, the court will consider how much the business owner is earning from the business or other sources. They will also consider debt service obligations and assets to determine a repayment plan.
A Chapter 13 bankruptcy filing won’t eliminate debts the way a Chapter 7 bankruptcy filing can, but it can allow the business owner to “catch their breath” while they repay debts at a lower rate (and lower monthly expense).
Chapter 13 bankruptcy also provides the business owner with certain benefits compared to a Chapter 7 or Chapter 11 bankruptcy filing. Perhaps most importantly, a Chapter 13 bankruptcy filing can allow the business owner to keep their car or keep their home in order to continue to remain an active member of the working society.
Contact Me to Discuss Your Denver Small Business Bankruptcy Options
The only way to know your best course of action if you are a struggling small business owner is to contact me for a free consultation. And of course, the sooner you take action, the more I can do to help you improve your situation.
I handle small business bamkruptcy filings throughout the Denver metro area including Aurora, Centennial, Englewood, Littleton, Parker and more.