Business Bankruptcy Lawyers
Small business owners fuel a significant portion of our nation’s economy. They provide jobs, pay taxes, and participate in their communities. Many are disciplined financial stewards that are familiar with personal sacrifice and solid work ethics. However, some factors that negatively impact the business’s financial state are beyond anyone’s control.
When businesses continue to operate while in decline, they can encounter critical debt. Our team of business bankruptcy attorneys at Leinart Law Firm can help you set the best course for recovery. Federal laws allow businesses to file for Chapter 7, Chapter 11, or Chapter 13, but each method is determined by a number of factors, including the structure of the business.
Leinart Law Firm has been helping people and businesses in financial crisis for more than 15 years, so we understand the risks you take and the challenges you face. Each client has a unique situation, but chances are that we have helped a business facing financial problems that are similar to yours. Our team will apply their skills and knowledge to represent your company in court in the best possible way.
Helpful Information About Business Bankruptcy
What is Business Bankruptcy?
Consumer bankruptcy involves Chapter 7 and Chapter 13 of the bankruptcy code, and typically a business bankruptcy will involve Chapter 7 or Chapter 11 of the bankruptcy code. However, many small businesses and sole proprietorships may have Chapter 13 bankruptcy available to them. Depending on how you have your business set up and how you conduct your business transactions, you may be able to discharge your business debt in a consumer bankruptcy.If you are a small business owner, you may want to factor in your business plans when deciding what type of bankruptcy to file. For example, a Chapter 7 bankruptcy may be a viable option for you if you want to discharge your debt without a repayment plan and gain a fresh start. However, if you plan on continuing your business, you may want to elect a Chapter 13 bankruptcy in order to maintain a relationship with your vendors and suppliers.
Also, depending on your situation and your business entity, you will need to determine whether you need a consumer bankruptcy, a business bankruptcy or both.
The decisions regarding the type of bankruptcy you elect to file will depend on your situation and goals. An experienced bankruptcy lawyer can help you understand the benefits and limitations of your bankruptcy options so you can make an informed decision about how to proceed.
Are You Personally Liable For Business Debt?
Your personal liability for business debt depends on the structure of your business, and here’s how:
- Sole Proprietorship – A sole proprietor is not a separate legal entity. Therefore, you and your business are considered the same and are liable for business debt on equal terms.
- General Partnership – In a general partnership, each partner is considered a general partner and is personally liable for business debt.
- Limited Partnership – In a limited partnership, there is at least one general partner and at least one limited partner. The general partner holds liability for business debt whereas the limited partner does not.
- Limited Liability Partnership (LLP) – An LLP is designed to protect all partners from personal liability for the debts of the business. However, in some states the liability protection is valid only for negligence claims so all partners may still be personally liable for business debt.
- Corporation – Shareholders of a corporation typically have no personal liability for business debt. However, shareholders may also be held liable if a creditor can prove that some corporate formalities were not followed.
- Limited Liability Company (LLC) – Similarly to corporations, LLC members are not liable for business debt unless they guaranteed the debt personally.
Our expert attorneys will analyze the structure of your business and help you understand whether you are personally liable for business debt.
Avoid the Means Test in a Business Bankruptcy
Most people seriously considering bankruptcy qualify for Chapter 7 straight bankruptcy by passing the means test without any trouble. However, for some people, especially those who formerly operated a business and now have higher than average income, this test can be difficult to pass. For these people, being able to avoid the means test can be very helpful, potentially saving tens of thousands of dollars.The means test is designed to require those who have the “means” to do so to pay back a meaningful amount of their debts. Those people are not allowed to file a Chapter 7 case, but must instead go through a three-to-five-year Chapter 13 case. The means test is based first on your income, and then if that’s not low enough, also on your expenses, using a very complicated set of rules. Being able to avoid all this and be permitted to file a Chapter 7 case regardless of your income and expenses can be a huge advantage.
Your Business Debts Can Be Higher Than You Think
Certain kinds of business debts can skyrocket beyond what they appear to be, and you may even have some business debts that you did not know about. Both of these can pump up the non-consumer side of your debts so that you don’t have “primarily consumer debts” and can avoid the means test. One example of a much-higher-than-expected business debt could be from a commercial lease that you abandoned, because the unpaid lease payments projected out over the intended term of the broken lease and other contractual obligations could add tremendously to your balance owed. Examples of unexpected debts could be claims raised by partners, employees, vendors or others allegedly harmed by the business closure. Or your business records may not be well organized, so that you have older debts that you have forgotten about or are not sure of the current balances.If you have more or larger than expected business debts, they may allow you to skip the means test and discharge all your debts through a Chapter 7 case when you could not have otherwise.
Small Business Bankruptcy Litigation
If you are closing your business and filing for bankruptcy in part because you are being sued, what happens to the lawsuit against you and the business?
Business Litigation Can Kill Your Business
A business often closes its doors because it is fighting a lawsuit.
The disputes from which these lawsuits arise can take many forms, such as a simple collection action by a supplier on unpaid inventory, a contractual dispute with a major customer about the services or products provided by the business, an enforcement action by a governmental agency for a serious regulatory violation, a battle with a competitor about patent infringement or some other essential intellectual property, or an internal fight involving the other owners or investors in the business.
The business may be teetering on the edge of closing already when a lawsuit against it is filed. Or the business may be pushed into closing in large part because the opposing party wins a major judgment against the business and/or the owner (or the business) runs out of money to pay the costs of litigation.
So what happens to the litigation against you and/or the business once you file for bankruptcy?
(This question assumes that your business is in the form of a sole proprietorship. If it is a corporation, a limited liability corporation, a partnership, or some other form of business entity, there are other complications. If your business is in one of these other forms, please call to set up a consultation with us about your particular situation.)
Reasons Why Most Litigation Will End upon Your Bankruptcy Filing
The primary reason that bankruptcy stops business litigation is because the debt or claim that your adversary is trying to get you to pay will most likely be discharged — legally written off permanently — in your bankruptcy case.
Your adversary can ask for “relief from the automatic stay” to try to get the bankruptcy judge’s permission to continue the lawsuit or to collect on a judgment. But that likely won’t go anywhere if the claim or debt is of the kind that would be discharged anyway.
Your adversary could also file an “adversary proceeding” in bankruptcy court to object to the discharge of the debt or claim. But these objections present significant legal and practical challenges:
They are difficult for your adversary to prevail in. The legal grounds for objections are relatively narrow. Debts are presumed to be discharged unless those narrow grounds of “nondischargeability” can be proven to be met. This is entirely different and usually much more difficult than just proving that your business owes money or other damages. Beyond establishing the existence of a valid debt or claim, as would be done in a conventional lawsuit, your adversary must also prove that you engaged in certain specific narrow types of bad behavior that make that valid debt or claim not dischargeable in bankruptcy. This usually requires you to have been involved in fraud or material misrepresentation against your adversary when incurring the debt, or to have embezzled, committed larceny, engaged in fraud as a fiduciary, or caused intentional and malicious injury to your adversary or to its property.
Beyond these legal hurdles, when you file for bankruptcy, your adversary gets practical indications that it would be wasting its time and money to keep pursuing you. Your bankruptcy documents, filed under penalty of perjury, provide a detailed set of information about your finances. They usually reveal that you have nothing worth chasing. So even if your adversary believes it has a valid and nondischargeable claim against you, when faced with the reality that all of its effort and expense would not be doing it any practical good, most adversaries will call it quits.
Our Attorneys Can Help Relieve Your Debt
What makes us different from our competitors? Many clients are surprised to know that they will meet with an attorney on their very first visit, something that is not common for other bankruptcy law firms. We also offer a complimentary consultation and evaluation for prospective clients. This allows us to meet you, listen to your situation, and determine if you qualify for bankruptcy or would benefit from our other debt management solutions.