End-of-Year Bankruptcy Considerations for Small Business Owners

It’s been a tough year for many small businesses. From rising interest rates to challenges with hiring and retaining high-performing employees, many small business owners have struggled to find a path to profitability. With the end of the year fast approaching, it is natural for many struggling business owners to start thinking about bankruptcy.

So, should you file?

There are several considerations involved in deciding whether a business bankruptcy makes sense. Not only are there multiple bankruptcy options to consider, but in many cases, small business owners will have viable alternatives to filing for bankruptcy as well. Informed decision-making is key, and making informed decisions starts with hiring an experienced Miami Chapter 11 bankruptcy lawyer to guide you forward.

What Benefits Would You Achieve Through a Business Bankruptcy Filing?

One of the first key considerations for small business owners who are thinking about an end-of-year bankruptcy filing is ensuring that they have a clear understanding of the benefits that can be achieved through the business bankruptcy process. There are a lot of misconceptions out there, and, unfortunately, these misconceptions lead to bad decision-making in many cases.

Broadly speaking, a business bankruptcy can serve one or both of two primary purposes: (i) eliminating (or “discharging”) the business’s debts and/or (ii) reorganizing the business’s debts so that it can afford to pay over time. However, not all business debts are eligible for discharge, and when reorganizing their debts, small businesses can still end up with unmanageable financial obligations if they are not careful.

As a result, even if your small business is struggling financially, this doesn’t necessarily mean that filing for bankruptcy is your best option. It could be—but you might have better options as well. With that said, discharge and reorganization of debts aren’t the only benefits that can be achieved through a business bankruptcy filing, and an experienced Miami Chapter 11 bankruptcy lawyer can help you consider all of the pertinent benefits so you can make an informed decision.

What Type of Business Bankruptcy Should You File (if You Move Forward)?

If pursuing an end-of-year business bankruptcy makes sense, then one of the next major decisions you will need to make is choosing which type of business bankruptcy to pursue. While there are several options, most small business owners choose one of the following:

• A Chapter 7 “Liquidation” Bankruptcy – Filing under Chapter 7 is an option for eligible small business owners who are prepared to wind down their companies. In a Chapter 7 bankruptcy, the company liquidates its assets in order to satisfy its debt obligations, which typically results in business closure.
• A Chapter 11 “Small Business Case” Bankruptcy – Reorganizing a company’s debts under Chapter 11 allows it to remain in business as it pays down its total debt load over time. While the costs of a traditional Chapter 11 filing can be prohibitive, a “small business case” bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) can be a cost-effective option.  
• A Subchapter V “Small Business” Bankruptcy – Another cost-effective option for many small businesses is filing for a “small business” bankruptcy under Subchapter V. This is a relatively new section of Chapter 11 that is specifically intended to facilitate reorganization filings for small businesses.

While Subchapter V is still relatively new, filings under Subchapter V are quickly becoming the preferred option for small business owners who need debt relief but still want the opportunity to turn things around. Not only are Subchapter V filings significantly less expensive than Chapter 11 filings, but they also allow for streamlined processing and other procedural benefits that aren’t available in “small business case” bankruptcies under BAPCPA. With that said, filing under Subchapter V isn’t necessarily the best option for a small business bankruptcy—and, again, small business owners should also consider any viable alternatives to bankruptcy before they commit to filing a petition.

Is Filing for Bankruptcy Your Best Option, or Are Better Alternatives Available?

Let’s say your small business is struggling. You took on debt with a plan to build a profitable business, but things are not going to plan. If your small business can’t meet its monthly financial obligations, why wouldn’t you consider a bankruptcy filing?

Even in this scenario, filing for bankruptcy isn’t necessarily the best option available. Some small business owners will have other, more cost-effective options available that also avoid the negative impacts of a business bankruptcy filing. For example, rather than filing for bankruptcy, a small business may be able to regain its financial footing through means including:

• Equity Infusion (from Existing Owners or Outside Investors)
• Internal Restructuring
• Informal Workout (Debt Restructuring)
• Assignment for the Benefit of Creditors

While filing for a small business bankruptcy will make sense in many circumstances, as with all business-related decisions, it is important not to rush to judgment. Even if filing for bankruptcy ultimately proves to be the best choice, it is still worth working through your options to ensure that you are making the best choice for you, your business, your clients or customers, and your employees.

When Should You File for a Business Bankruptcy?

Now, let’s say you have worked through all of your options, and you have determined that filing for a business bankruptcy is the right decision. When should you file?

Generally, once you decide to file for a business bankruptcy, there is no reason to delay the process. In fact, filing promptly will afford the greatest benefits in most cases. Additionally, waiting until after the start of the New Year will add to the documentation you need to collect, and if your small business is at risk of default, filing promptly could save you significant headaches (and costs) over the holiday season.

Discuss Your Business’ Options with a Miami Chapter 11 Bankruptcy Lawyer in Confidence

If your small business is struggling and you would like to know more about your options, we invite you to get in touch. To schedule an appointment with a Miami Chapter 11 bankruptcy lawyer at Edelboim Liberman, please call 305-768-9909 or inquire online today.