Orange County Lawyers Discuss Small Business Bankruptcy in New York
There are many bankruptcy-related options available to a financially troubled Small Business. Figuring out which option is best requires an analysis of many factors. The bankruptcy relief available to the Small Business is initially determined by the nature of the business entity. Only a Sole Proprietorship is eligible for a Discharge under Chapter 7, Chapter 11 and Chapter 13. Neither Corporations, Partnerships nor Limited Liability Companies are authorized to file a case under Chapter 13. Each can file a case under Chapter 7, thereby obtaining the benefits of the automatic stay, but none are eligible to receive a Chapter 7 Discharge. Every business entity is eligible to file under Chapter 11 and obtain a Chapter 11 Discharge.
For most Small Businesses in dire financial straits the threshold question should be: (1) Do we file a Chapter 7 Bankruptcy? (2) Do we attempt to reorganize the business under Chapter 11?
There are many situations where a Chapter 7 Bankruptcy can the preferable bankruptcy option for a Small Business, including:
- The Small Business has no chance of ever becoming viable, which can occur for various reasons. Perhaps there is no longer a market for the product you are selling (i.e., rotary telephones, encyclopedias, etc.). Perhaps the equipment you are using is so outdated or dilapidated that you cannot compete in your marketplace, and you lack the funds for replacement equipment.
- The only assets of the Small Business are the owner’s skill, knowledge and contacts in a particular field. This is generally the case in most personal services-type businesses such as consulting, or installation and repairs. The owner can simply discharge the debt in Chapter 7 and continue on in the same field, frequently having to change only the name of the business entity.
- There is so much debt owed that the Small Business would never be able to repay even a portion of it under any circumstances.
- A “Big Box Category Killer” has moved into your area, and you cannot compete with them. Home Depot and Lowes have driven most “Mom and Pop” hardware stores out of business, just like Staples and Office Depot have driven out of business most local stationery and office supply stores.
- The company’s work force does not have the skills required to compete in the marketplace. Your employees may be the best in the world at repairing rotary-dial telephones, but if they cannot repair digital phones or hand-held devices, the company will continue to have problems. Unless you are prepared to either (1) re-train your existing work force, or (2) fire your existing work force and hire appropriately skilled employees it will be very difficult to recognize such a business.
- The management of the business is unable to achieve or sustain profitability. A small business is often run by the person(s) who started the business, who frequently is very capable at the technical skills needed to do their job but lacks the skillset and aptitude to actually run the business. Just because someone is a good carpenter does not mean they can properly price a job, deal with employees or handle the voluminous paperwork that goes with the job. If the small business is still being run by the same management team it will be very difficult to reorganize.
The following questions should be considered by any Small Business contemplating a Chapter 11 Reorganization:
- What caused the problems that the business is currently facing?
- Can these problems be fixed?
There are certain situations that do lend themselves to successful reorganization, such as:
- The Small Business is healthy but “cash strapped”, resulting in its inability to simultaneously fund its ongoing business operations AND continue to pay its existing debt.
- The Small Business is healthy but plagued by disadvantageous leases or long-term contracts, such as when it is paying excessive rent for commercial space that it no longer needs and/or can no longer afford.
- The Small Business is healthy but certain creditors (frequently taxing authorities) are threatening to seize the assets or cash that the Small Business needs to continue with its operations.
Once you get your bearings as to which type of bankruptcy might be available and appropriate for the problem confronting your Small Business, you are encouraged to examine our more detailed treatments of:
Limited Liability Companies
The experienced Business Bankruptcy Lawyers at Hayward, Parker & O’Leary Esqs. will be more than happy to help you and your Small Business navigate through the tough and uncertain financial waters that are confronting you.