Is Your Business Eligible to File Bankruptcy?

Question #1 for cleaning up financially after a failed business: can the business file a bankruptcy without you? Question #2: should it?

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Today’s blog addresses Question #1. The next blog addresses Question #2.

Your former business can’t file a bankruptcy on its own unless it is a legally recognized entity. So if it had been formally set up and operated as a corporation or a general or limited partnership, it can file bankruptcy. If instead it operated under your name or under an assumed business name—a “dba”—it cannot file its own bankruptcy.

However, even businesses which can file bankruptcy, can do so only under Chapters 7, 11, and maybe 12, and not under Chapter 13.

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This blog is NOT intended to give you all you need to know about whether your no-longer-operating business or you should file bankruptcy. Many factors go into that decision. This blog addresses only the very beginning of this decision-making process: is your business ELIGIBLE to file bankruptcy?

Is Your Business Its Own “Person”?

Your business can only file its own bankruptcy if it is a legally recognized business entity, a legal “person” distinct from you. If you established and ran the business under a formally registered corporation, that corporation can file a bankruptcy. If you established and ran the business as a formal partnership, that business partnership can file a bankruptcy.

In contrast, if you operated the business under your own name, or under a “dba” (“doing business as”), that business is not legally separate from you as an individual, so it cannot file a bankruptcy. That’s true even if you legally registered that “dba” name with a state agency (usually with the “corporation division” of your secretary of state’s office), paid for a local business license, and/or had separate bank accounts for the business. That business is legally just a part of you as an individual and cannot file its own bankruptcy.

How about if your business was established as a corporation but over time you did not keep the corporation’s finances distinct from your own? How about if operated your business in fact as a partnership of three partners and kept distinct partnership books but never formalized the partnership through the state or local authorities?  Whether that corporation or that partnership can file a bankruptcy, and what the consequences would be of such a bankruptcy, depends on the circumstances, and requires a careful discussion with an experienced business bankruptcy attorney.

Corporations and Partnerships Cannot File Chapter 13

Chapter 13 is reserved for “individuals”—actual people, not corporations or business partnerships. Specifically “[o]nly an individual with regular income” and who does not owe more than certain amounts “may be a debtor under Chapter 13… .”

Corporations and Partnerships Can File Chapter 7, 11 and 12

Legal business entities like corporations and partnerships can file under Chapter 7, a straight bankruptcy, to help in the orderly liquidation of the business’ assets and the fair distribution of the proceeds to the business’ creditors. Such a Chapter 7 may not be necessary or helpful if the business does not have any of its own assets, other than those which are collateral on secured debts.  

Under a Chapter 11 “business reorganization,” the business would continue to operate or be sold as a going concern. Although most bankruptcy courts make an effort to run small business Chapter 11 cases efficiently, they are still very expensive—seldom less than tens of thousands of dollars in court, U.S Trustee, and attorney fees. So Chapter 11 is seldom a practical solution for very small businesses.

Under a Chapter 12 “adjustment of debts of a family farmer or fisherman,” the family farming or fishing operation would continue operating. To qualify that operation must meet certain maximum debt limits, and other qualifications to show that it is sufficiently oriented towards farming or fishing and is sufficiently family-owned.

 

Whether a business CAN file its own bankruptcy leads to the question whether it SHOULD do so, to be covered in the next blog. 

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