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If it Comes to Bankruptcy, Can Your Practice Be Saved?

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When we hear the word "bankruptcy," a business-ending Chapter 7 liquidation immediately comes to mind. This doesn't have to happen. You can save your business with these two strategies.

Many of us hoped that 2010 would start an economic turnaround that would enable individuals and businesses to keep their heads above water and avoid bankruptcy.

While some pockets of the economy show signs of modest improvement, much of Southern California’s economic base, for example, has not responded well to the “economic stimulus.” Many small businesses and self-employed persons, have, or are considering, simply throwing in the towel.

Is there an alternative to closing the doors or letting everything go? Absolutely!

When we hear the word “bankruptcy,” the immediate picture that comes to mind is that of a Chapter 7 liquidation which ends the business. If the business has a chance of survival, Chapters 11 or 13 may be the more appropriate way to save the business.

When large corporations suffer financial losses, Chapter 11 provides a method of restructuring their debt and allowing them to stay in business. However you don’t have to be GM or Pacific Gas & Electric to file Chapter 11. Small businesses, corporations, partnerships, sole proprietorships, and individual professionals may file Chapter 11, remain in business, and avoid liquidation.

There are provisions in the law for a “Small Business Chapter 11” to speed the process and make it less costly. A Chapter 11 is based on a new business plan that you formulate. Under Chapter 11, the debtor may seek an adjustment of debts by reducing the debt, by extending the time for repayment, or seeking a more comprehensive reorganization. There is no debt limit in a Chapter 11. The only real requirement is that there is some hope of reorganization.

Chapter 13 is also a debt repayment plan. In contrast to a Chapter 11 plan, the 13 plan is very simple and more structured. Chapter 13 eligibility is limited by a debt ceiling but many small businesses qualify (if not, the small business 11 may be appropriate). Most people think only an individual can file a Chapter 13. While partnerships and corporations cannot file a Chapter 13, sole proprietorships or individual professionals may be eligible for relief under Chapter 13.

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One important advantage of Chapter 13 is that the plan reduces debt by extending the time for repayment, or seeking a more comprehensive reorganization. There is no debt limit in a Chapter 11. The only real requirement is that there is some hope of reorganization. Chapter 13 is also a debt repayment plan.

In contrast to a Chapter 11 plan, the 13 plan is very simple and more structured. Chapter 13 eligibility is limited by a debt ceiling, but many small businesses qualify (if not, the small business 11 may be appropriate). Most people think only an individual can file a Chapter 13. One important advantage of Chapter 13 is that the plan consideration of whether the debtor is solvent or insolvent.

In 2005, Congress passed legislation making qualification for Chapter 7 more difficult by requiring the use of a “Means Test” which used gross income as a limiting factor. Fortunately, if your debt is primarily business debt, the income limits may not apply.

Bankruptcy law in 2010 is more complicated than ever, but with highly skilled counsel guiding the process, you and your business can survive this unprecedented downturn.

While successful Chapter 7 and 13 bankruptcies require modest experience, a successful Chapter 11 filing is complicated and is nearly impossible without years of experience. The final message here is that there is help for struggling businesses.

Attorneys Nathan Fransen and Dr. Paul J. Molinaro are the founding partners of The Law Offices of Fransen & Molinaro, LLP. Nathan and Paul apply their extensive training, knowledge, and years of experience to every legal case they handle. Nathan has been a mortgage broker and owner of a real estate and mortgage company. Paul is a licensed broker with many years of real estate investment experience and has also been a practicing physician for over sixteen years.


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