As the world steps into the third year of a global pandemic, governments are introducing many new laws and policies to combat the pandemic and relieve the economic situation in their respective countries. The US Government has also enacted several laws to help keep small businesses afloat. Before the pandemic hit, small businesses made up almost half the economic activity in the US. Out of this 44% of small businesses responsible for the US economy, 54% have already closed in the past two years. About 43% of these businesses are predicted to stay closed permanently. This includes about 75% of small businesses near Delray Beach Florida and other parts of Florida.
The reason so many small businesses are closing down has been piling debt and bankruptcy. Hence, new laws were introduced to provide relief to small businesses and help them stay open.
Bankruptcy Laws for Small Business Owners in the US
Now, three main bankruptcy filing options are available for small business owners, namely Chapter 7, Chapter 11, and Chapter 13. Chapter 11 and Chapter 13 use the reorganization process, whereas Chapter 7 uses Liquidation.
Let’s take a look at these bankruptcy laws in detail and how they can benefit small businesses:
Chapter 7 for Small Businesses
Chapter 7 uses the liquidation process for small businesses. The liquidation process takes place when business assets are divided among creditors as the business closes down. Small businesses with business structures as sole proprietors, partnerships, corporations, and limited liability companies can file for Chapter 7.
How Chapter 7 Benefits Small Businesses
This small business owner bankruptcy law is ideal for small businesses with a sole proprietorship business structure as it wipes out their unsecured debt and qualifying debts, including credit card debts, back rents, loans, lawsuit judgments, and utility bills. However, as it places business assets of sole proprietary businesses as personal assets, personal assets including mortgages and vehicles can be at risk.
Chapter 7 does not wipe out debts for partnerships, corporations, and LLCs. But it does help by making the Bankruptcy trustee responsible for selling off assets and paying creditors.
Chapter 11 for Small Businesses
This small business owner bankruptcy law uses reorganization for failing small businesses. Under this law, small businesses with business structures including partnerships, corporations, LLCs, and sole proprietorships can file for bankruptcy.
This law reorganizes the debts and is useful to keep a business afloat. It requires enough profit generations from the small business to keep paying small payments to creditors.
How Chapter 11 Benefits Small Businesses
Small businesses should only file for Chapter 11 when they are certain they can stay in business. If they have experienced a lowered income in the pandemic, such small businesses can let go of some of their staff and get their debt reorganized to stay in business on a smaller scale.
Chapter 13 for Small Businesses
Chapter 13 can only be filed by businesses with a sole proprietorship business structure. Partnerships, corporations, and Limited Liability Corporations cannot file for this small business owner bankruptcy law.
Similar to Chapter 11, Chapter 13 also utilized the process of reorganization. Small business owners with the sole proprietorship structure can continue to run their business and make small payments to creditors.
How Chapter 13 Benefits Small Businesses
Chapter 13 benefits small business owners in two ways. First, they don’t have to give up their business assets to make payments. The amount of payments is reduced as per the business scale and profit generation. Secondly, Chapter 13 removed the personal liability to small business owners from the debt. While it doesn’t wipe off the debt as does Chapter 7, it makes the small business liable to pay the debt instead of the small business owner.
Hence, Chapter 13 can be ideal for business owners with smaller and payable debts who want to keep small businesses open.
Which Bankruptcy Law Should You File Under?
The right answer to this question depends on the business structure of your small business and your plans regarding it. You can compare the pros and cons of each of Chapter 7, Chapter 11, and Chapter 13 and the effects they might have on your business. While only you can decide what to do with your business, consider speaking to a bankruptcy lawyer in Delray Beach Florida, before making a final decision.