Filing for Bankruptcy as a Sole Proprietor

Filing for bankruptcy as a sole proprietor? Chapter 11 may be the best option to save your business. When owning a small business, generally the sole owner has many of their assets tied into the business. For this reason, small businesses are allowed the ability to rearrange their debt in order to catch up on their debts using repayment plans. To do this, business owners with debts exceeding the Chapter 13 debt limits may file bankruptcy under Chapter 11 can repay their creditors over a given period of time.

Small businesses and individuals have the option under Chapter 11 to handle their own finances during the bankruptcy process without the help of a bankruptcy trustee to cover the financial affairs. However, this doesn’t mean a bankruptcy trustee won’t be appointed, one maybe, but as the business owner of a small company the control will generally be held by the sole proprietor, subject to fiduciary obligations to their creditors, monitored by the United States Trustee.  This luxury is often regarded as an advantage for small businesses because owners know their company’s best and will work in its best interest. Understanding the needs for success in the business’s industry is key, and control over the financial affairs can be more wisely directed from an owner’s position.

Another benefit of filing with Chapter 11 as a sole proprietor of a small business is having the ability to reorganize finances and allow for payment to creditors to be made at later times. With Chapter 13 a sole proprietor’s business will be ordered to start paying on debts immediately upon filing the case (within 30 days), and the payments may be released to creditors after the bankruptcy plan is confirmed (approved) by the Court. Chapter 11 allows for a delay for when the business is in a better place financially to make those payments back.

Not only is there a delay on paying back creditors, but the payment term could be extended beyond the 5 year maximum repayment plan of Chapter 13 under certain circumstances. The Chapter 11 repayment terms are considered to be much more lenient than others.

As with other chapters of bankruptcy, Chapter 11 will have the bankruptcy estate become the owner of your property, which includes business assets if your business is a sole proprietorship. All collection activity will immediately become restricted, but this will give you the time to discover and examine strategies for reorganization of your business. You will have the exclusive right to propose a plan for 180 days to propose a plan, and if the debtor is a “Small Business Debtor” as defined by the bankruptcy code, strict time constraints exist for plan confirmation.

When the needed approval has been made by a sufficient number of creditors in each class, or by at least one class of creditors, the entire bankruptcy plan can be approved if conditions are met, and terms for repayment will be put into place. Ideally with the restructure, your business will have less debt to reimburse and be on track for financial recovery.

Chapter 11 bankruptcy has substantial benefits, but is also extremely expensive and time consuming.  It is often not the best course for a small business.  Chapter 11 is also extremely complicated, and includes many potential pitfalls for the unwary debtor or attorney who may dabble with bankruptcy.  Be certain that any attorney with whom you consult is well versed in Chapter 11 proceedings, as most bankruptcy attorneys are unfamiliar with chapter 11 practice.

Get in touch with us

The intersection of opportunity and culture is a critical one; we’ve cultivated the expertise to provide cross-border business and financial counsel.
LET'S TALK.