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Personal and Business Bankruptcy: Chapter 7, Chapter 11, Chapter 13

When Should a Maryland Business Consider Bankruptcy?

Bankruptcy is often thought of as the last option for a business. It is often perceived as throwing in the towel and giving up. Some situations do indeed call for nothing short of Chapter 7 bankruptcy and closing the doors. But that’s not always the case. Some businesses struggling with cash flow challenges and overwhelming debt can use other forms of bankruptcy or non-bankruptcy strategies to get some breathing room and resolve their issues without shuttering the business. So then the question is how to know whether some form of bankruptcy is appropriate or not.

Let’s start with what it means to be bankrupt. A business is bankrupt, or insolvent, when its expenses and debt payments exceed its revenue. If this is the case for your business, you should strongly consider bankruptcy as an option. However, this is not the only determining factor and does not indicate which form of bankruptcy is most appropriate. Bankruptcy is not always the answer even for insolvent businesses and some businesses that are solvent will benefit from bankruptcy.

Other factors to consider:

  • Has a lender issued a "technical default" that indicates they are not willing to work with you even though you aren't seriously delinquent
  • Is your company unable to pay bills as they come in?
  • Is a bank taking action against the company’s assets or is threatening to?
  • Is there too little time to negotiate with lenders before they take action?
  • Would lower debt payments make you solvent again or put you back on top of your company finances?
  • Are your personal assets or the assets of other owners/shareholders at risk, either because of lack of corporate veil or because of personal guarantee on a loan?
  • If your business had no more debts, would it have positive cash flow?
  • Are your company’s creditors willing to negotiate?

Non-Bankruptcy Options for Troubled Companies

The following should be considered before pursuing bankruptcy as an option. They are generally less costly and don’t have the stigma of bankruptcy.

Negotiate with creditors

A business that is near insolvency, or insolvent but not greatly so, may be able to negotiate with creditors to reduce payments or put the debt on hold while the company gets back on its feet financially. Many creditors would much rather delay repayment than have the debt discharged completely in bankruptcy. However, you’ll need to show that you have a good plan for correcting the situation. Your plan will most likely include one or more of the next three strategies.

Refinance or debt consolidation

Refinancing may enable your business to get a lower interest rate or other terms that will make a debt more manageable and possibly resolve solvency issues. If the business has numerous debts, the combined payments for which are too much for current cash flow, consolidating those debts under one loan could reduce interest rates and is likely to result in a payment amount that is significantly less than the total payments separately.

Recapitalize

Corporations and limited liability companies may benefit from recapitalizing stock to generate cash that can be used to pay off or pay down troublesome debts. Recapitalization can also generate investments to fund growth efforts that could return the company to solvency.

Restructure

Shutting down part of the business that is too costly or running in the red can often return a company to solvency. Restructuring management to eliminate redundant positions or streamline the manpower required can also be beneficial.

Form a new company

At times forming a new limited liability company can aid a debtor in separating its troubled assets from its worthwhile and beneficial contracts. This also allows a business owner to separately corral delinquent debts from new contracts that may be a growing benefit to all future growth of the business.

Bankruptcy Options for Troubled Companies

If return to solvency is not likely through the above strategies or there is not enough time to implement them before creditors start taking action in court, then filing for bankruptcy may be the only way to get the breathing room you need to fix the problem. Some advisers don’t recommend filing for bankruptcy unless your personal assets are at risk. But if you can’t run your business without the assets likely to be repossessed, then bankruptcy should be strongly considered.

Chapter 7

In a Chapter 7 bankruptcy, your company’s assets are sold and the proceeds are used to pay off creditors. It is not recommended unless the other forms of bankruptcy are not likely to solve the issues at hand as Chapter 7 effectively shuts down the business. Find out more about Chapter 7 bankruptcy through ourMaryland Chapter 7 Bankruptcy articles.

Chapter 11

Chapter 11 is a reorganization bankruptcy that forces creditors to modify terms of the debts owed to them for a period of time so that the debtor company has an opportunity to return to solvency. It is a complex and costly process that is best suited to large corporations and wealthy business owners who need more flexible options or don’t meet the income requirements for Chapter 7 or 13. Please read our article on the Chapter 11 Bankruptcy Process for more information.

Chapter 13

Chapter 13 is a reorganization bankruptcy similar to Chapter 11 but simpler and less costly. It gives a business an opportunity to reorganize finances, modify repayment terms and discharge some debts. This is often the first option to look at for small businesses and closely held corporations or limited liability companies. More information about Chapter 13 bankruptcy in Maryland is available on the Chapter 13 page of our website and in our other Maryland bankruptcy articles.

All forms of bankruptcies require creditors to halt collection of debts once the debtor-company’s bankruptcy petition has been filed in bankruptcy court. This provides an opportunity for the debtor company to create a plan without the concern of impending lawsuits or repossessions. Sometimes bankruptcy is filed in order to activate the stay against creditors, but later the company decides not to complete the bankruptcy process as they discuss options with creditors.

Is bankruptcy the right option for your business?

If your business is struggling with debt and cash flow issues or is insolvent, discussing the matter with an experienced bankruptcy and debt management attorney can help you determine which options are best for your company.

Maryland bankruptcy and debt management attorney John D. Burns and his firm can assist in identifying the best solutions for your company and help put a plan into action that will resolve your debt and insolvency issues. Call our office at 301-441-8780 to schedule an appointment or e-mail us at jburns@burnsbankruptcyfirm.com.

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