There are several types of bankruptcies available to businesses (and individuals) depending on the circumstances and goals of the company’s owners.
Chapter 13 Bankruptcies
One of the most common types of bankruptcy is Chapter 13. Chapter 13 applies to individuals and sole proprietorships and is generally designed to adjust debt for individuals who also have a regular source of income.
Under Chapter 13, there are limits to how much debt one can have in order to utilize this filing type. In these proceedings, a trustee is appointed to act as the dispensing agent to the creditors. Monthly payments or an agreed-upon payment plan is then made to the trustee which is then dispersed to the creditors based on a prioritized creditor scheme. The trustee will further determine which debts will be paid and which will not. Generally, individuals may have anywhere from three to five years to make these payments.
Chapter 7 Bankruptcies
Another common option under types of bankruptcies is Chapter 7. Chapter 7 is a complete liquidation that applies to both individuals and corporations.
When an individual or entity files for Chapter 7, they are essentially indicating that they no longer wish to be in business any longer. Under these proceedings, a trustee will be appointed to find hard assets of the entity and liquidate them to pay off creditors. From the filer’s perspective, the process is much quicker and takes approximately 90 days to complete. At the end of the proceeding, an individual filer will then be discharged of most debts. A corporation does not receive a discharge, but after administration the corporation will be nothing more than a shell entity.
It should be noted that this will not preclude the creditors from trying to sue the corporate entity. But for all practical purposes, the action would potentially be uncollectable since the corporation no longer has any assets. From the creditor’s side, they would most likely claim the uncollectable debt as a business loss if they obtained a judgment order.
In the context of an individual or sole proprietor, there are some assets that can be declared exempt, in order to give the individual debtor a fresh start. If the debtor operates a sole proprietorship, the Trustee may require that the Debtor shut down the business, or may allow the Debtor to continue it, depending on whether the Trustee thinks the business could generate a better sales price as a going concern. If the business is a personal services business, the Debtor generally is permitted to continue operating post-bankruptcy filing. If the Debtor is a corporation, the Trustee will generally require that the business cease operating upon the filing of a Chapter 7 petition. If the owners of the business want to continue to do a similar type of business, they will need to form a new business entity to do so. If they want to use the same address, phone number, customer list or similar business “assets” they will have to purchase those assets from the Chapter 7 estate.
High income earners (those whose income are above the State’s median income) with a majority of consumer debt (a defined term) will need to pass a means test showing that their income less allowable expenses will not allow the Debtor to pay unsecured creditors at least some part of their claims within a reasonable period of time (in which case the Debtor should file a Chapter 13 or 11). The calculations are complicated and usually require that an attorney use a bankruptcy filing program to determine whether the means test will preclude a Chapter 7.
Consumer debts generally refers to credit card debts or other loans used primarily for household purposes. Tax debt, medical bills and certain other forms of debt are NOT consumer debt and will except the Debtor from having to pass the means test.
Chapter 11 Bankruptcies
The last main type of bankruptcy is Chapter 11. Chapter 11 is a process whereby the debtor proposes a plan to reorganize the structure of their entity. Under this proposal, the debtor stays in control of their business and files a proposed plan outlining how the creditors will be paid. In general Chapter 11 cases, no trustee is appointed but the case is overseen by the Office of the United States Trustee, a division of the Justice Department. In larger cases, the U.S. Trustee may also appoint committees of Unsecured Creditors (and sometimes other committees) who may be authorized to hire their own counsel at the estate’s expense. These committees often work with the Debtor to propose a Plan that protects their interests sufficiently that the Plan will be approved by the Court.
There is a recent new form of Chapter 11, SubChapter V, designed for individuals and small businesses whose debts do not exceed a certain threshold. The amount in the Code is $2.7M, but Congress has expanded the limit to $7.5M for at least another two years. In SubChapter V cases, a Trustee is appointed at the outset of the case. The Debtor still operates as a Debtor in Possession, but the Trustee oversees the case to make sure the Debtor is operating properly. Confirmation requirements are less stringent for SubChapter V cases, making plans easier to confirm over objections of some creditors.
Chapter 12 Bankruptcies
If the entity is question qualifies as a family farmer, they may file under Chapter 12. Chapter 12 is designed for small business and businesses that are not corporations who have a small amount of debt.
Under these proceedings, the filer must pay the debt within five years, but the debt will be adjusted based on the payment plan. However, for example, if the agricultural company is an LLC or a company, the appropriate procedure is to file a Chapter 11.
Can a cannabis company file for bankruptcy?
Currently, the answer is no. Although marijuana may be legal in California and some other States, it is not legal under federal law and therefore does not qualify for Bankruptcy. Rather, these companies will either be forced to work with creditors or risk the chance of being placed out of business.
About the Finkel Law Group
Finkel Law Group, with offices in San Francisco and Oakland, has more than 40 of experience assisting our clients navigate federal bankruptcy laws and state insolvency statutes. Our attorneys have the experience and expertise needed to help you and your management team successfully complete the liquidation or reorganization of your corporation, partnership or limited liability company.
When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with the bankruptcy and reorganization issues confronting your company please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter for a cost-free consultation.