“Business bankruptcy” isn’t a legal term as there’s no designated chapter for businesses or businesspeople to file bankruptcy in. Thus, the correct question is which chapter is best for businesses and their principals to file in. The answer depends on the structure of the business and the principals’ goals for running it.
For sole proprietorships i.e. businesses that aren’t incorporated entities in the state, the bankruptcy is no different from a personal bankruptcy. As a result, chapters 7, 11, and 13 are all available. This should make sense: Wage-laborers sell their work in the same way that businesses sell products or services, and so there isn’t much of a distinction between their occupations in bankruptcy terms.
As to what the chapters do for debtors, chapter 7 filings are rarer because they require the debtor to cease the businesses’ operations unless the trustee chooses to take it over and run it, which is also rare. Obviously there’s nothing preventing the debtor from resuming the business if it’s personalized, like being a musician. As with a consumer bankruptcy, any of the debtor’s assets that can’t be protected by an exemption will be sold by the trustee.
Because assets might not be exempt and debtors might want to continue their businesses, filing in chapter 11 or 13 are often more appropriate options. Chapter 13 allows the debtor to craft a repayment plan that’s repaid over 36-60 months. Chapter 11 might be mandatory for debtors whose debts are higher than allowed in chapter 13, but otherwise it’s similar to chapter 13 in that the debtor proposes a repayment plan, except the creditors get to vote on it. Often chapter 11 helps debtors who need time to sell real estate or some other assets to streamline their businesses and make payments to their creditors.
For partnerships (LLCs, for example) and corporations (Incs.), the business is a separate entity and files its own bankruptcy petition, but they’re limited to chapter 7 and chapter 11. In most cases, though, the principal owners file personal bankruptcies as well. The choice here is more obvious since if the principals choose chapter 7, they must shut down the business. This often leaves chapter 11, but that chapter is flexible enough to accommodate most owners’ business plans. Since the Small Business Reorganization Act became effective, on February 19, 2020, small businesses who choose to file chapter 11 will find it easier to reorganize.
Filing bankruptcy while owning a business or as the principal of one is significantly more complex than filing a personal bankruptcy. Not only are such cases more complicated legally and factually, but they also sometimes require coordination between multiple business partners that isn’t always needed in consumer bankruptcies. As a result, hiring an experienced New York bankruptcy lawyer is crucial to accomplish your personal and businesses’objectives.
For answers to more questions about business bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.