Kentucky Bankruptcy Law

Counsel with Care

Special Concerns for Small Business Owners

These last years of recession afforded me the privilege of consulting with a number of small business owners. There are special concerns for the small business owner facing a debt crisis and so finding someone with experience in this area is paramount. Few small business owners would be good candidates for a Chapter 11 bankruptcy because of the expense involved, but it is wise to consult a practitioner that has a grasp of Chapter 11 issues even when looking at a Chapter 7 or possibly a Chapter 13.

Ordinarily, the small business owner’s personal finances are tied to the business finances in such a way that an individual Chapter 7 or Chapter 13 is necessary, even if most of the debt belongs to the business. In other words, just filing a Chapter 11 or Chapter 7 on the business almost always leaves the business owner still personally liable on the debt. The practitioner, then, must analyze whether both a business and an individual bankruptcy is necessary. If only a business entity needs to enter bankruptcy, then things remain fairly straightforward. If an individual (or joint for married folks) bankruptcy is required, then what will come of the business?

Very often the small business owner wants to keep their business up and running through the entire individual bankruptcy. Sometimes there are practical reasons behind this, but many times it is more of a sentiment. The small business owner understandably becomes very attached to the business entity. It is very common for the small business owner to have a hard time differentiating between themselves and the business because they have put so much work and care into it that it becomes an extension of themselves. Solid legal counsel can help you figure out just what the risk is of keeping the entity as a going concern versus letting is dissolve or filing a business bankruptcy.

One key factor the attorney must analyze is the value of the business. To do this, the assets, including accounts receivables, must be valued and any secured debt tied to those assets must be ascertained. Furthermore, is there transferable goodwill or a client list with substantial value? Is this a sole owner business or are there multiple owners? If multiple owners, how readily transferred are the debtor’s shares? Once a best estimate of the value is derived, the attorney must see if there are sufficient exemptions to cover the non-encumbered value (equity). If the value can be exempted, then the attorney must determine the likelihood of challenge by the trustee based on the nature of the business and help the small business owner decide what level of risk they are comfortable with. If the value cannot be exempted fully, then the lawyer should help sort out what a Chapter 13 plan payment would look like given the unique set of facts involved or if there is a source of funds to buy the non-exempt interest back from the trustee.

Depending on the option the owner/debtor chooses there are a number of other considerations to take into account beyond these basic ones listed. However, one thing is almost assured, unless the business is shut down or bankrupted too, a Chapter 7 will last one to two years rather than five to six months. The Chapter 13 would not be extended beyond its normal time frame, but that is three to five years.

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February 11, 2013 - Posted by | Bankruptcy, Chapter 11, Chapter 13, Chapter 7, Planning, Pre-filing planning, Property (exempt, Redeem / Redemption, Security interests, The estate | , , , , , , , , , ,

1 Comment »

  1. […] See the article here: Special Concerns for Small Business Owners – Kentucky Bankruptcy … […]

    Pingback by Special Concerns for Small Business Owners – Kentucky Bankruptcy … | How To File For Bankruptcy | February 11, 2013 | Reply


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