“I must file bankruptcy for my business.” That is not likely a part of your business plan but, if conditions bring you to that point, you must formulate a cohesive plan to manage safe passage through the bankruptcy minefield.
Rule number one: If you are filing bankruptcy for a business entity you must use an attorney. Make certain you hire one who you can trust and work with through what will be a long and thorny process.
The following lays out a step by step procedure for filing for bankruptcy for your business.
Before meeting with an attorney
- Gather financial information (financial reports if you have them). If you don’t have financial reports, at least bring an outline of monthly income and expenses plus a list of assets and liabilities.
- Also bring copies of your last filed tax returns and an indication of your ongoing cash flow
- Think about what you want to accomplish by going through bankruptcy. Would you like to keep the business going? Are you experiencing a one-time or temporary issue that can be overcome? Or would you rather shut the business down either immediately or through a more orderly process.
If you and your attorney decide that proceeding with bankruptcy make sense, the process follows along these lines:
- Your attorney will ask you to gather more specific financial information such as banking documents and a true profit and loss statement.
- Your attorney will then prepare 1) a bankruptcy petition, 2) “schedules,” which take a snapshot of the current state of your business and 3) a “statement of affairs” recording more historical information over the past one to two years.
If your business is a sole proprietorship, be prepared to discuss business and personal assets. In some cases it will make sense for you to form an entity first and place your business assets in the entity, all before filing for bankruptcy.
There are two options to assess, moving forward.
Option A: Reorganize the business so it can continue to operate after bankruptcy is complete (chapter 11)
- Within a few weeks of when the case is filed, the office of the U.S. Trustee will contact your attorney.
- A member of their office reviews the documents to understand the case and ensure that the documents are in order. He or she may ask for more information or clarification. An important clarification: once paperwork is filed you are not permitted to pay past unsecured debts. Your business simply needs to pay new obligations going forward.
Note that this person will not take on the role of a “trustee” – he or she will merely work to guide your case through the process.
Once your contact at the US Trustee decides the paperwork is in order, you and your attorney will conduct a meeting of creditors, which is the first official step in the process. At this point an attorney from the U.S. Trustee office gets involved. This hearing is usually a simple meeting that is conducted in a conference room. In many cases no creditors actually attend the meeting.
From this point forward you would have a requirement to file and pay fees to the US Trustee Office quarterly.
The next step is to conduct a courthouse hearing before a judge, called a status conference. The hearing brings the judge up to speed on the case. At this point the court will usually set a deadline for producing a formal reorganization plan. You would then work with your attorney to develop a plan for repaying your creditors.
Once the plan is created you would enter what is called the plan confirmation phase, involving two steps.
1. Financial disclosures: in order to
- Give creditors enough information to decide if the plan will work and if they want to support it.
- Demonstrate how you will afford reorganization.
- Explain why you cannot afford to repay any faster than outlined in the plan.
The court will decide if the disclosures are adequate and then set a date for the confirmation hearing.
Creditors vote on the plan. Once the court has confirmed that the disclosures are adequate, you and your attorney must allow the creditors to vote on the plan. In most cases there are multiple classes of claims such as small unsecured, general unsecured, priority creditors, and perhaps employees and shareholders. Each class gets to vote and you will need at least one of the classes that will not get all of their debts paid to accept the plan. You will also need at least 1/2 in number and 2/3 in dollar amounts of your creditors to accept the plan. Ballots can be returned by mail email or fax typically.
2. Once this step is satisfied, you will be seeking to get the plan confirmed in court at the confirmation hearing. If the plan is contested on facts, such as amount of financial claims, it could turn into a trial. Otherwise, the confirmation hearing is more procedural than anything and is likely to result in confirmation. The last step is the final decree which is after execution of the plan is confirmed to have begun. Then the case is officially closed and payments to the US Trustee are no longer required.
Option B: Liquidate (chapter 7)
If you plan to liquidate rather than reorganize your business, your case would be declared a Chapter 7 bankruptcy. Liquidation is a much faster process, for example under 90 days. Naturally, the steps involved are shorter. You would prepare the same initial documents, but right away the U. S. Trustee office would appoint a true trustee to manage the liquidation of assets. In this scenario, your job would simply be to attend the meeting of creditors and be available to the trustee as needed. The trustee would now be in charge of the assets of your business and any repayment plan to creditors.
In some cases, a business owner wants to manage the line down themselves. In this case you would follow chapter 11 rules but shorten the process including the filing of “no asset report.”
In a Nutshell:
Be prepared. Filing bankruptcy for your business opens a way out of crushing debt, but it is a long and perilous path. It may seem that your fate is entirely in the hands of the bankruptcy laws, but you can exert some level of control. Hire a lawyer, one steeped in bankruptcy law. Be prepared. Make certain that all your financial records are accurate and complete.
You are not alone. Last year over 25,000 companies filed bankruptcies for their businesses. Make this phase a step toward resolving debt and reclaiming your business career.