As a small business owner, you know that, at times, the tide is high with promising financial gains. However, there are moments when the tide recedes, revealing rocky challenges that seem impossible to overcome. This is a narrative that countless businesses, small and large alike, understand all too well – the dread and confusion accompanying the failure of the business in which you invested your sweat and tears.
However, facing financial adversity doesn’t have to mean financial ruin or the end of your business. Bankruptcy can provide a lifeline to businesses grappling with insurmountable debt.
In this article, we will provide an overview of business bankruptcy, outline the main types of business bankruptcy, the process, and the potential benefits and outcomes. We aim to answer the question, ‘What is business bankruptcy in Maryland?’ in hopes of providing you with a better understanding of your options.
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What is Business Bankruptcy in Maryland?
When you’re operating a business and find yourself unable to pay off its debts, business bankruptcy is a lifeline that can provide financial relief. The federal Bankruptcy Code was enacted so that businesses struggling with overwhelming financial obligations can have the opportunity to restructure and continue to operate. It provides your business with options when facing aggressive collection actions by creditors.
In the simplest terms, business bankruptcy works in one of two ways: 1) providing a court-overseen, orderly process to liquidate your business’s assets, or 2) restructuring business debts and proposing a plan that allows your business to continue operating without the burden of insurmountable debt.
The most effective choice will depend on your business’s current operations, cash-flow, and many other factors, including the sacrifices that your business is willing to make. As a business owner, it’s vital to understand the requirements that the Bankruptcy Code imposes and the unique ways in which the Bankruptcy Code allows for restructuring so you can make an informed decision about whether to use bankruptcy as a business tool.
How is Business Bankruptcy Different From Personal Bankruptcy?
In the eyes of the law, a corporation and a Limited Liability Company are treated as separate “persons” that can transact business, sign contracts, and take legally binding actions.
When a business entity files for Chapter 7 bankruptcy, at the end of the bankruptcy, the business ceases to exist and therefore the business does not receive a bankruptcy discharge. However, when an individual files for Chapter 7, they can typically expect to receive a discharge.
A business entity can file for Chapter 11 under various subsections of Chapter 11, including the small business subsection and Subchapter V. An individual who files for Chapter 11 must file as an individual and will not be able to utilize these other subsections.
When to File for Business Bankruptcy
Bankruptcy should be considered for your business under a number of circumstances. Some of these critical factors include:
- Inability to keep up with debt payments;
- Facing aggressive collection actions or lawsuits from creditors;
- Significant financial losses that overshadow your business’s assets and potential future earnings;
- Repeated, unsuccessful attempts to revitalize your business outside of bankruptcy;
- A consistent negative cash flow;
- Loss of major customers or market shares leading to severe financial challenges;
- Large tax liabilities that your business is unable to pay.
If you are facing any of these circumstances, filing for business bankruptcy may provide indispensable relief-whether you wish to restructure or liquidate your business.
We hope that, by answering the question “What is business bankruptcy in Maryland?” and explaining when it is a beneficial avenue to pursue, you will better understand your options.
Types of Business Bankruptcy
There are three kinds of business bankruptcy that apply to corporations and limited liability companies: Chapter 7, Chapter 11, and Chapter 13. Chapter 13 can apply to a sole proprietorship, as the law makes no distinction between a sole proprietorship and its owner.
Chapter 7 Bankruptcy for Businesses
Chapter 7 bankruptcy, also known as the liquidation chapter, is a type of business bankruptcy in which the business ceases operations and any remaining assets are sold by a Chapter 7 trustee to pay off creditors according to the priorities codified in the Bankruptcy Code. The Bankruptcy Code refers to Chapter 7 as, “‘liquidation’ – the sale of a debtor’s nonexempt property and the distribution of any proceeds to creditors.” The liquidation process is conducted by a court-appointed trustee who handles the sale of assets and distribution of proceeds to creditors. Chapter 7 is a sensible option for businesses that see no viable path forward and decide that winding down operations is the most prudent choice.
However, Chapter 7 business bankruptcy is not always the most desirable option; it’s typically considered a smart maneuver for businesses that see no viable path forward and wish to shut down.
Chapter 11 Bankruptcy for Businesses
Chapter 11 bankruptcy is also known as reorganization. It allows the business to continue operation while restructuring its debts under court supervision. Pursuant to the Bankruptcy Code, Chapter 11 “generally provides for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time.” The plan of reorganization that a business proposes-drafted with the help of a bankruptcy attorney-must be approved by creditors and the US courts.
It’s important to note that Chapter 11 is a significantly more complex and time-consuming process compared to other bankruptcy options. However, it provides businesses with the opportunity to reorganize debts, renegotiate contracts, and emerge stronger and more financially stable.
Chapter 13 Bankruptcy for Sole Proprietorships
Chapter 13 bankruptcy, or “wage earner’s bankruptcy,” is typically used by individuals, but it may also be a feasible option for sole proprietors who want to restructure their debts while continuing their business operations. Under Chapter 13, a payment plan is created to repay some or all of the debt over a 3 to 5-year period. This plan allows the debtor to catch up on missed debt payments, and it can also prevent the foreclosure of the debtor’s property, via the utilization of the ‘Automatic Stay.’
However, Chapter 13 does have its limitations. Chapter 13 is not available to partnerships or corporations, and there are limits to how much debt you will be able to discharge. If the business owner’s secured and unsecured debts exceed these limits, they will not be eligible to file under Chapter 13 bankruptcy. As always, consulting with a bankruptcy attorney is imperative to understanding the most appropriate path for your specific business situation.
How Does Business Bankruptcy Work
Business bankruptcy is initiated when a business files a petition with the bankruptcy court. The type of bankruptcy filed – Chapter 7, 11, or 13 – will dictate the proceedings that follow. In general, all bankruptcy filings include detailed documentation of the business’s income, debts, and assets. This step involves substantial paperwork and petition filings with the US courts.
How Chapter 7 Business Bankruptcy Works
Under Chapter 7, the business ceases operations, and a court-appointed trustee liquidates the business assets to repay creditors. At the end of the case, the business does not receive a discharge and it effectively ceases to exist.
How Chapter 11 Business Bankruptcy Works
In a Chapter 11 bankruptcy, the business continues its operations as a debtor-in-possession while under the supervision of the court. The business drafts a reorganization plan and disclosure statement outlining how it plans on paying its creditors over time. This Chapter 11 plan must be voted upon by the creditors, and the disclosure statement must be approved by the court. Once approved, the business makes payments according to the plan while simultaneously operating and, hopefully, returning to profitability.
How Chapter 13 Business Bankruptcy Works
Chapter 13 bankruptcy is used by sole proprietors. It involves the creation of a repayment plan that lasts 3 to 5 years. Chapter 13 bankruptcy allows business owners to restructure debts and catch up on missed payments-while maintaining their assets.
The Automatic Stay in Business Bankruptcy
In all types of bankruptcy, an automatic stay is immediately invoked upon filing. The automatic stay halts collection activities against the debtor and its business. The automatic stay will stop lawsuits and wage garnishments. The Automatic Stay gives the business breathing room to either develop a plan for reorganization or to systematically liquidate assets under the supervision of the court in Chapter 7. This protective measure can provide crucial time and relief to a struggling business.
It’s important to remember that each type of bankruptcy has its own implications, potential benefits, and drawbacks. As such, navigating the bankruptcy process necessitates guidance from an experienced bankruptcy attorney.
What Happens When a Business Files for Bankruptcy?
Filing for bankruptcy is not simply the submission of paperwork, followed by a swift resolution. It is a multifaceted process that involves the courts, creditors, and often, the reevaluation and restructuring of the business’s operations. Upon filing a bankruptcy petition, the company must provide detailed documentation of its debts, assets, and financial transactions. This includes income statements, balance sheets, lists of assets and liabilities, a statement of financial affairs, and other relevant financial documents. While in bankruptcy, the business has various obligations, and failure to adhere to these could result in a dismissal of the case.
Is Filing Bankruptcy Good or Bad for Business?
Filing for bankruptcy might be the best option to assist your business in reducing or eliminating liabilities, selling assets, slimming down, and emerging stronger-particularly under Chapter 11. Chapter 11 often leads to a more efficient and financially stable business entity; one capable of meeting its financial obligations and achieving profitability.
Alternatively, filing for bankruptcy can provide a court-overseen, orderly wind-down of your business under Chapter 7. In these situations, where the financial situation of your business is dire and the prospects for recovery are slim, bankruptcy can serve as a structured mechanism for the liquidation of assets.
So, while bankruptcy is often seen as a last resort, both forms serve critical roles, either offering your business a chance for a fresh start or providing a definitive end with clear financial boundaries.
How a Business Bankruptcy Attorney Can Help
Navigating a business through bankruptcy is an intricate progression that demands a deep understanding of the law, financial acuity, and strategic foresight. Business bankruptcy attorneys, like Steiner Law Group, bring a wealth of knowledge and experience to the table.
An experienced business bankruptcy attorney can:
- Help you understand and adequately evaluate the various types of bankruptcy;
- Walk you through the process of business bankruptcy and its implications for your business;
- Evaluate your business’s financial health and potential future profitability;
- Assess the viability of a reorganization or the necessity for liquidation;
- Guide you through the multi-faceted maze of bankruptcy laws and regulations.
Steiner Law Group Can Help
At Steiner Law Group, we have experiencing answering the question, “What is business bankruptcy in Maryland?” We have helped hundreds of Maryland residents discharge millions of dollars’ worth of debt. We will work with you to prepare and file all required documentation, represent you in court, and advocate on your behalf in negotiations with creditors. We will manage the day-to-day legal tasks of your bankruptcy case, from drafting the reorganization plan and disclosure statement in a Chapter 11 case to ensuring that assets sold in Chapter 7 are sold for maximum value. This level of professional support can ensure that you’re making informed decisions and that your interests are protected throughout the bankruptcy.
The Bottom Line
Business bankruptcy, while complex and challenging, can serve as a critical tool for businesses in financial distress. Whether it’s Chapter 7, which offers an orderly wind-down of operations and a clean slate, Chapter 11, which allows businesses to restructure their debts and potentially emerge stronger, or Chapter 13 for sole proprietorships, the Bankruptcy Code is designed to aid businesses in their time of financial need.
Understanding the distinctions and potential implications of each type of bankruptcy, as well as the intricacies of the process, such as the automatic stay and the role of a U.S. Trustee, are imperative. The guidance of a seasoned business bankruptcy attorney can be invaluable in navigating this complex process, advocating for your best interests, and paving the way for a fresh start or renewed profitability. Ultimately, business bankruptcy isn’t a one-size-fits-all solution; it’s a strategic decision that requires careful consideration and professional advice for each unique business