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Basic considerations in small-business bankruptcy

We have written lately about small-business debt collection. Today we will instead look at the reverse problem: when a small business cannot pay its debts and considers bankruptcy as a potential answer.

Get legal advice

When a small-business faces financial challenges, the owner should speak with an attorney about potential legal remedies. Can the business tighten its belt by cutting back on costs, collecting debts owed to it, laying off employees or taking some other action to better the bottom line?

Beyond attempting to improve the financial condition of the enterprise through changing certain business practices, the family business may want to consider what options are available through bankruptcy and whether any of them make sense.

A bankruptcy lawyer can advise the business owner about whether bankruptcy could potentially help the business to survive and regain a healthy financial future.

The automatic stay

One aspect of bankruptcy attractive to small businesses is the automatic stay, meaning that when a business files for bankruptcy, all collection activity against the debtor business is immediately and automatically stayed. Prohibited activity includes creditor communications that attempt to collect an amount owed, lawsuits in process seeking judgments for money owed, and other kinds of collection activity. The automatic stay gives the debtor business time to catch its breath without the constant pressure of having to juggle the debts that it owes.

Bankruptcy options

The various kinds of bankruptcy that a small business can consider are:

•· Chapter 7: The property of the business is liquidated or sold to satisfy the debts of the business, usually effectively putting it out of business.

•· Chapter 11: A Chapter 11 business bankruptcy allows the debtor business to continue and keep its assets, but the creditors are heavily involved in approving a long-term plan to pay off the debt, possibly extending payments over a period of years. Sometimes if the creditors do not approve a plan, the court may allow it anyway if it is fair. Some debt may still be discharged.

•· Chapter 12: This is a special proceeding for family farms and commercial fishermen as debtors. It is essentially a streamlined Chapter 11 case.

•· Chapter 13: Unlike a Chapter 11, only an individual can file a Chapter 13 bankruptcy, including sole proprietorships. In Chapter 13, the debtor make payments to a trustee for 3 or 5 years based on the debtor's disposable income.

The bankruptcy lawyers at Giddens & Gatton Law,amp; P.C., in Albuquerque advise and represent small business owners and family farmers in a wide variety of bankruptcy matters.

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