Bankruptcy as a Tool for Your Business to Succeed

Bankruptcy as a Tool for Your Business to Succeed

Let’s think back to General Motors: 2009 vs. 2013.

General Motors filed for bankruptcy in 2009, and it was insolvent. General Motors owed about $173 billion and had assets of about $82 billion. They were unable to pay its bills when they were due.

Because of bankruptcy, the business was able to shed a lot of its debt, reduce their U.S. plants from 47 to 34 and its employees from 91,00 to 68,500. They sold or closed Hummer, Pontiac, Saturn and Saab. The federal taxpayers then became 60.8% owners of General Motors when the U.S. government gave G.M. a loan of 50 billion dollars.

Only four years later, General Motors is turning a profit again. By the end of 2013, the government sold the last of their common stock. This loan to the auto industry saved an estimated 1.1.4 million jobs, according to the Center for Automotive Research.

If you own a small business, filing for bankruptcy might be able to save your job as well as your business.

 

Sole Proprietorship

If your business is not operated as a corporation, limited liability (LLC), partnership or other sorts of legal entirety, then practically speaking, it is a sole proprietorship. Although you might have an “assumed business name” or “DBA” (“doing business as”), you most likely own and operate the company alone.

There are many pros and cons to this system of managing your business. You and your company are treated as a single economic entity, which is different than your business being operated as a corporation. A corporation would have its  assets and debts that would be separate from you or a shareholder.

 

Chapter 7 Bankruptcy

So let’s imagine that you are the sole proprietor of your business. Chapter 7 bankruptcy (aka “Straight bankruptcy,” or “liquidating bankruptcy) allows you to discharge your debts in exchange for liquidation. This means that you legally write off your debts by surrendering your assets in order to be sold. Once they are sold, they are distributed to your various creditors. Usually with most Chapter 7 cases, you don’t necessarily have to surrender and liquidate your assets but you can still discharge your debts. Everything you own is exempt.

However, Chapter 7 is a risky option in the case that you want to keep operating your business (sole proprietorship). You would have to check with your attorney as to which assets of yours would be exempt under the applicable laws in your state. These items (amongst others) may not be exempt:

  • Accounts receivable
  • Customer list
  • Business name
  • Favorable premises lease

Therefore, these assets might be taken by the trustee, and you should proceed with caution to avoid losing your business.

 

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is usually a better option for ongoing sole proprietorship businesses. Chapter 13 has “adjustment of debts” that is designed to help you keep your personal and business assets. Chapter 13 can usually protect your business and personal assets that may not be exempt.

With Chapter 13, you generally receive a significant reduction in the amount of debt that you will repay, along with immediate relief from your creditors. Chapter 13 can help your business with immediate cash flow as well as long-term prospects. This is also a recommended way to deal with tax debts, which are usually a major issue for a business that might be having problems. It allows you to continue your business while you smooth over your debts.

 

Remember, General Motors is now a profitable business again, and yours can be too!