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A business owner who considers filing for bankruptcy often asks whether the business can continue to operate after they file bankruptcy. The answer largely depends on the chapter of the U.S. Bankruptcy Code under which the business files. At Wernick Law, our business bankruptcy practice focuses on Chapter 11 reorganization and small business reorganization under Chapter 11, Subchapter V, both of which allow a business to continue operations during the reorganization process, while benefiting from the protection of the automatic stay, which protects the company from creditor actions. Other types of bankruptcy that may be alternatives for a business work differently from Chapter 11 in terms of continuing operations during the bankruptcy.
A business owner considering bankruptcy may choose from several different types of bankruptcy under the individual Chapters of the Bankruptcy Code, depending on the nature, financial situation, and legal structure of the business.
Generally, the choices for the type of business bankruptcy include Chapter 7, referred to as a liquidation bankruptcy, and Chapter 11 reorganization or Subchapter V, Chapter 11 reorganization for eligible small businesses. Chapter 13, referred to as a wage earner’s plan, is a type of personal rather than business bankruptcy but may be used in some circumstances by the owner of a sole proprietorship to address business debts. Finally, Chapter 12 provides a special procedure that enables financially distressed family farmers and family fishermen to propose and carry out a plan to repay all or part of their business debts while continuing the family business.
There are also alternatives to bankruptcy, like an assignment for the benefit of creditors, which can also provide relief to a company facing financial struggles.
As the name implies, Chapter 7 liquidation bankruptcy involves the sale of all nonexempt business assets under supervision of a U.S. trustee and repayment of creditors from the proceeds. Since it is not feasible for a business to continue operations without assets, the business is typically closed at the beginning of the proceeding and ceases to exist at the conclusion of a Chapter 7 case.
After a Chapter 7 bankruptcy, depending on the circumstances, the business owner may be able to utilize assets exempt from the liquidation — such as tools of the trade or assets associated with a service-oriented business — to get a fresh start in a new business. However, continuation of the original business during and after a Chapter 7 bankruptcy is not feasible.
Chapter 11 of the Bankruptcy Code allows a business to reorganize, restructure, and reduce debt over time, while continuing business operations under the protection of the bankruptcy court. Chapter 11 business bankruptcy is available for sole proprietorships, partnerships, and corporations.
The Chapter 11 process is complex, detailed, and time-consuming — and simply filing a Chapter 11 petition does not guarantee a successful result. Developing a reorganization plan, securing approval of a plan by the creditors’ committee and plan confirmation from the bankruptcy court, and continuing to operate under the plan for the specified term all require compliance with detailed procedures, meticulous attention to detail, and the ability to navigate through the entire process.
Before making the decision to pursue Chapter 11 business bankruptcy, receiving guidance from an experienced Chapter 11 business bankruptcy lawyer is essential. A business owner must understand all the immediate and long-term considerations and consequences, as well as all the procedures involved in the Chapter 11 process, in order to make a fully informed decision about filing for Chapter 11 bankruptcy.
For eligible small businesses, Chapter 11, Subchapter V provides a streamlined, more expeditious, and less complex alternative to Chapter 11 business bankruptcy. Currently, to be eligible, a small business must have less than $3,024,725 in secured and unsecured debt, with at least half the total coming from business activities. Pending legislation in Congress may eventually restore the debt limit to $7.5 million, which was the threshold before expiration (sunset) of that limit on June 21, 2024, under the terms of the applicable legislation.
Chapter 12 of the Bankruptcy Code provides a special procedure that applies to eligible family farmers and family fishermen, which may enable a qualifying family business to continue operations while operating under a repayment plan to make installment payments to creditors for a specified period of time.
Chapter 13, also called a wage earner’s plan, is normally used for personal bankruptcy but may provide a viable bankruptcy process for a sole proprietor business owner wishing to reduce debt and continue business operations. The process involves establishing a repayment plan to make payments to creditors over a set period of time. Financial eligibility criteria apply to the Chapter 13 bankruptcy process.
If you are a business owner struggling with business debt, bankruptcy may be an option to consider. The type of bankruptcy you file makes a significant difference in the immediate and long-term results of the bankruptcy process, including whether you can continue business operations during and after bankruptcy.
You should be certain that you consider all the bankruptcy options that are available in your circumstances and assess the full implications of pursuing a specific type of bankruptcy. Talking with an experienced bankruptcy lawyer before you make a decision ensures that you have all the information you need to make the right decision for you and your business.
At Wernick Law, we concentrate the majority of our practice on Chapter 11 debtor representation. We welcome Florida businesses wishing to learn more about Chapter 11 reorganization bankruptcy or Subchapter V, Chapter 11 small business reorganization to schedule a consultation by calling 561-961-0922 or using the online contact form.
Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.
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