Whether a Chapter 7 bankruptcy filing is the optimal choice for a financially struggling New Jersey business depends on many factors, including:
- Whether the business is structured as a sole proprietorship or as a corporate entity or as a partnership
- The nature and extent of the assets of the business and whether the owners seek to protect those assets from being liquidated
- To what extent the business provides personal income to the owners (like salary)
- Whether the business is currently operating
- Whether the owners want or need the business to continue operating through and beyond the bankruptcy process
- The nature of the business and whether the business requires extensive physical assets to operate
- Whether the owners have personal obligations — like contract guarantees — for business debts that need to be extinguished or reorganized through bankruptcy
- And more
Given the many factors, the choice of how to proceed is complex and nuanced. If you think you may need to file a business bankruptcy, it is essential to consult experienced New Jersey bankruptcy lawyers, like those at Silverberg Law, LLC, for advice and counsel.
One main reason for the complexity is that, when a business files for Chapter 7 bankruptcy, the expectation is that the business will stop operating as a going concern and that its assets will be liquidated for the benefit of the business creditors. That may not be what the owners of the business want or need.
Many times, the owners need the business to continue operating because the business is the main source of personal income. Under those circumstances, Chapters 11, 13 or Subchapter 5 may be better options since, under those Code provisions, the business can continue to operate, with the owners retaining control, while the debt is restructured via a court-approved reorganization and repayment plan. Much depends on why the business is struggling and on whether a reorganization plan will allow the business to operate with sufficient positive cash-flow to pay its expenses and make payments under the reorganization plan. Generally, a reorganization plan has a term of three to five years.
That being said, if the business is of the sort that it can be operated with little equipment and/or inventory, like an accounting business or other service provider, then a new business can be started to begin providing personal income for the owners. In that case, it may not be necessary for the previous business to continue operating, in which case, Chapter 7 might, indeed, be the best choice.
For the same reasons, if the business owns assets that the owners want to continue owning, like real estate or some sort of intellectual property, Chapter 7 may not be the best choice since those assets will be sold during the bankruptcy. Even here, though, there is complexity since it is possible that bankruptcy exemptions might be available to protect some assets from being liquidated.
As noted, how the business is organized is also a factor. For example, if the business is operated as a sole proprietorship, then a Chapter 7 business bankruptcy will also be a personal Chapter 7 bankruptcy. Qualified business debts, any personal guarantees of business debts and qualified personal debts can be discharged through the Chapter 7 bankruptcy proceeding. In New Jersey, an advantage of a business/personal Chapter 7 filing is that, if more than half the debts are business debts, then the debtor does not need to satisfy the means test.
On the other hand, if the business is operated through a corporate entity, like a New Jersey corporation, then only corporate-held assets are liquidated and only corporate debts and obligations are discharged. However, a corporate Chapter 7 bankruptcy will have no impact on personal guarantees that the owners may have signed. Creditors of the bankrupt corporation can seek to collect corporate debts from personal assets of the owners based on those guarantees. A Chapter 7 bankruptcy is also not generally recommended if the business is operated as a partnership unless all the partners plan to file personal bankruptcies too. In general, under a partnership form of organization, each partner is individually liable for all of the partnership’s debts and obligations. Thus, if the partnership and Partner A file for bankruptcy, creditors will simply seek to collect outstanding debts from Partner B or from Partner C, etc.
Contact an Experienced New Jersey Small Business Bankruptcy Lawyer Today
For more information or if you are considering bankruptcy protection for your New Jersey business, contact the experienced and proven New Jersey Bankruptcy attorneys at Silverberg Law, LLC. We have 30 years of experience helping small businesses in New Jersey and New York. Use our “Contact Us” link or call (732) 992-3000 to schedule a free consultation.