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L.A. Bankruptcy for Small Business Owners Requires Legal Planning

By Encino Bankruptcy Attorney on January 5, 2014

Business bankruptcy filings across the country plummeted by 25 percent last year – the lowest they have been since at least 2006. That’s according to a new report released by the American Bankruptcy Institute.

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Business bankruptcy filings soared in 2007‚ as we first began to feel the effects of the recession.The ABI has reported‚ however‚ that about 44‚100 companies filed for bankruptcy last year. That’s down from nearly 58‚000 the previous year. The total number of filings by both businesses and individuals is down to 1.03 million from the 1.19 million recorded in 2012. Over the last five years‚ the average number of annual filings has been about 1.32 million.

Part of the reason it’s so low right now is because right before the recession‚ in 2005‚ a series of legislative actions were passed that made it tougher for individuals to file for bankruptcy.

As experienced Los Angeles Chapter bankruptcy attorneys‚ our concern is that businesses and individuals who really should file for bankruptcy protection are shying away from it. The tougher laws are part of it‚ but there is also this persistent – and erroneous – belief that bankruptcy is something that should be vigorously avoided at all costs.

But particularly for small business owners‚ this is not a discussion they can afford to avoid. Our concern is that some who may highly benefit from a bankruptcy are steering clear on the false assumption that it means failure.

The truth is‚ when done right‚ sole proprietors who file for bankruptcy protection can save the company‚ as well as bolster their own personal financial well-being. By extricating yourself and the company from debt‚ you become free to focus on business development and other priorities.

However‚ these individuals need to be especially careful that the filing is conducted properly. Otherwise‚ there is a risk that all of it could be jeopardized.

When debts become unmanageable‚ all businesses and individuals have the option to file for a bankruptcy‚ whether liquidation or reorganization.

Small business owners operating as sole proprietors must file for a personal Chapter 7 when considering a liquidation bankruptcy. This is because legally‚ you and the company are considered a singular entity. In these situations‚ a single personal bankruptcy will allow you to discharge both your business and personal debts. Often‚ one can shield all or most of the company’s assets by applying for certain exemptions. This allows the business to keep its doors open after the debt has been eliminated.

For other business owners exploring their options‚ it can make sense to file for both personal and business bankruptcy. This is because filing solely for a business bankruptcy isn’t necessarily going to wipe out one’s personal liability for the debts of the business.

If the business is structured as a corporation‚ partnership or limited liability company‚ a Chapter 7 filing may be an option if you and your team are looking to shut down and liquidate the firm. A Chapter 7 filing on behalf of the company thrusts the responsibility for selling assets and paying creditors onto the bankruptcy trustee. It becomes no longer your problem.

On the other hand‚ a small business owner may choose to file for a personal Chapter 13 bankruptcy. (This option is not available for the company itself.) By going this route‚ you will get to keep all assets and pay back a portion of debts through a repayment plan that allows you to reorganize the debt.

Understand‚ however‚ that a personal Chapter 13 filing is going to take longer‚ and you’ll be making monthly payments for the next three to five years. Further‚ this plan isn’t going to wipe out the business debts – only your own personal debts. Larger business may have other bankruptcy options under Chapter 11.

Choosing which option is right for you and your company is something that requires careful consideration and the advise of a bankruptcy lawyer.

If you are contemplating bankruptcy in San Fernando Valley‚ contact Nader‚ Naraghi & Woodcock‚ APLC to schedule your free consultation. Call (800) 568-0707.

Additional Resources:
U.S. business bankruptcies dropped 24 percent in 2013‚ Jan. 6‚ 2013‚ By Tom Hals‚ Reuters


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