If you’re a small business, there may come the point that you need to file for bankruptcy. Like most places, Minnesota is seeing a rise in small businesses filing for bankruptcy, many requiring an attorney to get things settled. Here’s what to know about bankruptcy for small businesses and what you should do if you need legal counsel or representation.
What is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts when they cannot pay them. It is a way for companies to start fresh and rebuild their finances. There are several types of bankruptcy, including Chapter 7, Chapter 11, and Chapter 13.
Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy, allows a person to discharge or eliminate most of their unsecured debts, such as credit card debt. To qualify for Chapter 7 bankruptcy, a person must pass a means test, determining whether they have enough disposable income to repay some of their obligations. If they do not, they may be eligible for Chapter 7 bankruptcy.
Chapter 11 bankruptcy is typically used by businesses to reorganize their debts and continue operating. The business is usually allowed to keep its assets but must use its future profits to pay off its debts. In a Chapter 11 bankruptcy, the company creates a plan to repay its creditors over time while continuing to work and generate revenue.
Chapter 13 bankruptcy is available to individuals who do not qualify for Chapter 7 bankruptcy or want to keep certain assets, such as their home or car. In a Chapter 13 bankruptcy, the individual creates a repayment plan to pay off their debts over three to five years. During this time, the individual must make regular payments to a bankruptcy trustee, who then distributes the costs to the individual’s creditors.
Why Do Small Businesses File For Bankruptcy?
There are several reasons that a business might file for bankruptcy, all of which are related to debt. Here are some of the most common reasons small businesses file for bankruptcy.
- Need for capital: Many small businesses need help to secure the money they need to start and grow their operations. With enough capital, companies cannot meet their financial obligations, resulting in bankruptcy.
- Lack of revenue: Insufficient revenue ties directly into insufficient income. A small business needs to generate more revenue from its operations to meet its financial obligations.
- Financial mismanagement: Poor financial management, including overspending, failing to track expenses, or not having a solid business plan, can lead to bankruptcy.
- Unforeseen circumstances: Natural disasters, economic downturns, or other unforeseen events can disrupt a small business’s operations and force them to file for bankruptcy.
- Competition: A small business must compete with larger, more established companies to generate enough revenue to stay afloat.
- Personal financial struggles: Small business owners who experience personal financial struggles, such as medical bills or credit card debt, often struggle to establish financial stability for their companies. In extreme cases, this can result in massive amounts of debt for an organization.
- Lack of networking: Failing to foster relationships with other businesses or industry professionals can limit a small business’s opportunities and limit its financial opportunities, which can lead to revenue loss and, ultimately, bankruptcy.
- Poor product or service quality: If a small business offers inferior products or services, it may need help attracting and retaining customers, which can result in financial disaster.
- Poor supply chain management: Small businesses that cannot effectively manage their supply chains, perhaps unsurprisingly, need help meeting customer demand and generating revenue.
What Are Some of the Benefits of Filing For Bankruptcy?
Filing for bankruptcy can be difficult and emotional for small business owners and can provide much-needed relief for those struggling with debt. Some of the benefits of filing for bankruptcy include the following:
Debt Relief
The primary advantage of filing for bankruptcy is that, depending on the type of bankruptcy and the ownership structure of the business, it allows small businesses to discharge some or all of their debts. This can provide welcome relief from the financial burden of debt, allowing small organizations to start fresh and focus on building their financial futures.
Protection From Creditors
Once a small business files for bankruptcy, it is protected from creditors attempting to collect on its debts. This can give the business time to restructure its finances and devise a plan to pay off its obligations without the added pressure of creditor harassment.
Reorganization
Bankruptcy allows small businesses to reorganize their finances and create a plan to pay off their debts over time. This can help them get back on track and avoid future financial struggles. The reorganization process can also allow small businesses to assess their operations and make changes, such as streamlining processes or cutting costs, to improve their financial stability.
Keeping Assets
Sometimes, small businesses can keep certain assets even if they file for bankruptcy, which can help them preserve the value of their business and potentially turn it around. Companies that fail to file for bankruptcy are often forced to relinquish some or all of their assets, but with Chapter 11, they are generally allowed to keep most of them.
Starting Anew
Bankruptcy offers small businesses a chance to start over. It encourages them to make new business plans and better financial decisions. This can help small businesses avoid the same financial mistakes that led to their bankruptcy and set them up for success.
How to Determine if You Need Legal Counsel or Representation
Deciding whether or not to seek legal counsel and representation when filing for bankruptcy can be tricky for a small business owner. There’s a lot to consider, and while it may be tempting to go about the process independently, working with an experienced legal professional can give you a leg up. Here’s what small business owners should consider when determining whether operating with a professional legal suits their business.
The complexity of the Bankruptcy Process
The bankruptcy process can be incredibly confusing, especially for small business owners unfamiliar with the legal system. Small businesses that find themselves in particularly sticky situations should consider seeking expert advice. Working with an experienced bankruptcy attorney can help small companies navigate the process and protect their rights.
Debt Amount
Small businesses dealing with copious debt are generally advised to seek legal counsel. In doing so, they can more easily negotiate with creditors and devise a solid plan to pay off their debts. This can also help ensure that everything is handled appropriately and that business owners don’t overlook any critical steps in the process.
Type of Bankruptcy
Different types of bankruptcy, such as Chapters 7 and 11, have different rules and requirements. An attorney can help small businesses understand these differences and determine which type of bankruptcy is best for their situation. If a small business owner needs help to make sense of this, it may be best to reach out for legal advice.
Business Structure
Small businesses that function as corporations or partnerships are often advised to seek legal counsel to ensure that the bankruptcy process is handled correctly and that the business’s assets are protected. Filing the wrong type of bankruptcy can result in a bigger mess for small companies, so they must consider their unique business structure when starting the process.
Personal Financial Struggles
Small business owners experiencing personal financial struggles can benefit from working with a bankruptcy attorney. They can avoid fees and penalties associated with the bankruptcy process. An attorney can recommend a course of action for reconciling their financial issues.
Are You a Minnesota-Based Business Looking For Bankruptcy Help? We’ve Got You Covered
Bankruptcy can be an extremely challenging process and exert tremendous stress on small business owners. Instead of trying to navigate this difficult time on your own, you can seek legal counsel from an experienced team of experts that understand the ins and outs of small business bankruptcy and can help get you started with business restructuring.
Gregory J. Wald is a Minnesota business bankruptcy attorney with over 30 years of experience helping small businesses manage debt. Whether you’re having trouble making the minimum monthly payments on your debts or are behind on bills, we can help get you back on track and ensure your rights are protected throughout the bankruptcy process. Get in touch with us today to learn more about our services.
