The Business of Bankruptcy

The Covid-19 pandemic has brought the economy to an unprecedented standstill in a variety of ways, and many large companies have already begun the process of bankruptcy already this year.  More well known companies such as Pier 1 Imports, Neiman Marcus, Stage Stores, as well as JC Penney just to name a few have been on the verge a few times already, but due to the current economic climate they’ve had to move forward with their filings in order to either shut down permanent or seek reorganization for potential survival.  What does that mean for small businesses who may just be one person?  The following are some general descriptions of key items to think about.

When filing for bankruptcy, a company must first determine if it is insolvent or bankrupt.  Insolvency refers to having sufficient income or liquid assets but still needs protection from creditors.  Bankruptcy is defined as having insufficient income or not enough liquid assets to cover all its outstanding liabilities.  For businesses, they can file for Chapter 7 or Chapter 11 bankruptcy, which the following are a few highlights.

Chapter 7

  • Debtor will turn over non-exempt assets to an assigned US Trustee who liquidates or abandons those assets
  • The Trustee then pays creditors from the funds available
  • Debt can still survive bankruptcy such as tax debt, governmental fines and penalties, and personal injury or death caused by the debtor
    • In addition to the petition for bankruptcy, the debtor must also file with the court:
      • Schedules of assets and liabilities
      • Schedule of current income and expenditures
      • A statement of financial affairs
      • A schedule of executory contracts and unexpired leases
    • All tax returns must be current and appropriate copies filed with the petition

Chapter 11

  • Debtor chooses either federal or state exemptions, depending upon where the entity is set-up and whichever exemptions are deemed more favorable to the business
  • Debt can still survive bankruptcy such as tax debt, governmental fines and penalties, and personal injury or death caused by the debtor
    • In addition to the petition for bankruptcy, the debtor must also file with the court:
      • Schedules of assets and liabilities
      • Schedule of current income and expenditures
      • A statement of financial affairs
      • A schedule of executory contracts and unexpired leases
    • All tax returns must be current and appropriate copies filed with the petition
    • You do have the ability to continue operating the business
    • You can repay your creditors through a court-approved plan of reorganization
    • A debtor repays a portion and/or discharges other creditor claims
      • Under Chapter 11, Subchapter 5 option, only the debtor files a reorganization plan and there are no competing plans from creditors
    • The debtor can not only terminate burdensome contracts and leases, recover assets, and rescale to profitability

Key Points

  • You will still need to file tax returns during the bankruptcy process for your business, for which the bankruptcy trustee files a Form 1041 for the bankruptcy estate
  • Chapter 11 is the most expensive option to file

Due to the complexities that any potential bankruptcy can involve, it is valuable that you not only research your options but also ideally consider choosing a licensed attorney in the state that your business is located in.  Although board certifications such as bankruptcy are voluntary, it means an extra layer of education and commitment to your situation.  It’s nothing to be taken randomly, and with a good attorney, you need a good accounting of your business resources to make sure that all of your financials and tax returns are complete and up-to-date.

Dwayne J. Briscoe

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