Chapter 7 Bankruptcy: How Do I Know If It’s the Best Option for My Situation?
As a business owner or entrepreneur, finding success means taking financial risks. In some cases, these risks don’t pay off, and it will be necessary to go back to square one and try again.
Filing for Chapter 7 bankruptcy affords this opportunity. Chapter 7 of the U.S. Bankruptcy Code allows business owners and entrepreneurs to eliminate their business debts through liquidation. Once the process is complete, the business’s debts and creditors are gone, but the opportunity to move forward remains.
5 Key Factors for Deciding Whether to Pursue Chapter 7 Bankruptcy
With that said, filing for Chapter 7 bankruptcy isn’t the best option in all situations. How do you know if it is the best option for your situation? Here are some of the key factors we consider when advising our clients:
1. Do You Qualify to File Under Chapter 7?
The first key factor is whether you qualify to file for bankruptcy under Chapter 7. If you don’t qualify, then it isn’t worth considering this option any further. The determining factor for qualification under Chapter 7 in most cases is whether you can pass what is commonly known as the “means test.”
But, the means test does not apply to individuals who have debts that are primary business debts. So, if you are considering bankruptcy due to unsustainable debts incurred in connection with your business endeavors, you may qualify to file under Chapter 7 regardless of your current means. To determine whether the means test applies to your situation, you will need to discuss the nature of your debts with an experienced business bankruptcy attorney.
2. Are You Prepared to Close Your Business and Liquidate Your Business Assets?
Generally, pursuing a business bankruptcy under Chapter 7 will involve winding up the company. This means that in order to file under Chapter 7, you must be prepared to close your current business and move on. Once you file, the bankruptcy trustee will liquidate your company’s assets to pay your creditors to the extent possible; and, while your business assets will be gone, you will no longer face the threat of lawsuits seeking to collect on debts you cannot afford to pay.
With this in mind, Chapter 7 is most often used as a tool by business owners and entrepreneurs who have few business assets, significant business debts and limited business prospects going forward. If you are truly ready for a restart, then filing under Chapter 7 may be a viable solution.
3. Is Closing and Liquidating Your Business Your Best Option?
Even if you are prepared to close your business if needed, this might not necessarily be your best option. In some cases, business owners and entrepreneurs will have more desirable options available. For example, depending on your situation, viable alternatives to filing for bankruptcy under Chapter 7 may include:
- Filing for Bankruptcy Under Chapter 11 – While Chapter 7 bankruptcies involve liquidation, filing under Chapter 11 allows business owners to reorganize their debts so that they have manageable payment obligations going forward.
- Securing Additional Business Financing – If your business simply needs more time or more resources to become profitable, then it may be worth exploring additional financing options before deciding to shut down.
- Renegotiating with Commercial Creditors – In many cases, it will be possible for business owners and entrepreneurs to renegotiate with their creditors outside of the bankruptcy process.
- Negotiating a Payment Plan or Offer in Compromise with the IRS – If your primary business debts are owed to the IRS, it may be a viable solution to negotiate a payment plan or offer in compromise.
4. Will a Chapter 7 Bankruptcy Serve an Adequate Purpose?
While Chapter 7 bankruptcy filings can be used to eliminate most debts, certain types of debts are not eligible for discharge under Chapter 7. If you will retain significant debts even after filing, then a Chapter 7 bankruptcy may not make the most sense for your individual situation.
Some examples of debts that generally are not eligible for discharge in Chapter 7 bankruptcy proceedings include:
- Government fines and penalties
- Certain tax obligations
- Debts owed to certain tax-advantaged retirement plans
- Student loans
- Divorce-related debts
- Debts obtained by fraud or false pretenses
If you won’t be able to pursue a new business venture due to your remaining post-bankruptcy debts, then pursuing one of the alternatives we discussed above could make more sense. To make an informed decision, you will need to examine all of your debts with an experienced business bankruptcy lawyer, identify those debts that will remain, and make an informed decision about whether a Chapter 7 bankruptcy filing will adequately serve its desired purpose.
5. Do the Consequences of Filing for Bankruptcy Warrant Revisiting the Alternatives?
Finally, eliminating your qualifying debts is not the only consequence of filing for bankruptcy under Chapter 7. Obtaining bankruptcy protection can have certain negative consequences as well. For example, it will significantly impact your access to credit in the coming years, and it could present challenges for obtaining both debt and equity financing from private investors. While bankruptcy is a tool that business owners can use in a wide variety of circumstances, many people still associate bankruptcy with failure, and this perception—no matter how misguided—can be difficult to overcome.
In short, deciding whether a Chapter 7 bankruptcy is the best option for your situation requires careful consideration of a variety of factors that are unique to your personal and business circumstances. The key is to make an informed decision that takes into account both your immediate financial concerns and your long-term business goals.
Discuss Your Options with a Business Bankruptcy Lawyer in Confidence
If you would like to speak with a lawyer about filing for Chapter 7 bankruptcy or explore the alternatives you may have available, we invite you to get in touch. To speak with a business bankruptcy lawyer at our Miami or Fort Lauderdale law offices in confidence, please call 305-768-9909 or request a free consultation online today.