Do I Need To File A Business Bankruptcy?

Whether you need to file a business bankruptcy depends largely upon the type of debt you have, the amount of debt you have, and whether you desire the specific business entity to continue doing business after the bankruptcy. When we refer to a business bankruptcy, we typically are referring to a Chapter 11 bankruptcy filing. While the phrase “business bankruptcy” is commonly used, quite often the exact same goals can be accomplished by filing a Chapter 7 or Chapter 13 in combination with a dissolution of the business entity. This article aims to help you understand your options and decide between them.

Personal Obligations On Business Debt

If your business debt is only owed by the business, you can simply dissolve the business entity. However, in most instances, especially small businesses, the obligation to repay the debt has been signed off on by the entity and again by the individual. One way to confirm this is to have a Charlotte Bankruptcy Lawyer review your contracts with creditors. If you are personally obligated on any business debt, it means exactly what it sounds like—if the creditor isn’t getting paid by the business, they can pursue you and your personal assets like your home, vehicles, and other assets.

In cases where you have personal obligations on business debt, simply dissolving the business entity will not resolve your problem. If you can’t repay the debt, your options are to consider the different chapters of bankruptcy and decide which is available to you, and which is a best fit.

Income Limitations In Bankruptcy

The different chapters of bankruptcy are meant to address different debtor situations. This is true as it relates to income, amount and type of debt, and whether the debtor wishes to retain or surrender certain property in conjunction with filing bankruptcy.

Chapter 7 Income Limitations

One way to address business debt and personal debt is to file a Chapter 7 bankruptcy while dissolving the business entity or allowing the entity to dissolve on its own per state statute. To put it simply, the filing of a Chapter 7 eliminates the personal obligation on the debt, and dissolving the business eliminates the business obligation on the debt.

Chapter 7 does have income limitations. The income calculations are based on the average income over the 6 months prior to filing bankrutpcy. Some debtors qualify automatically for Chapter 7 relief, based on the Median Income of the household. In North Carolina, as of November 2018 the following household income totals are the thresholds for qualifying for Chapter 7 relief:

  •  1 person-  $ 46,470.00 
  •  2 person-  $ 60,407.00 
  •  3 person-  $ 67,211.00 
  •  4 person-  $ 82,994.00 
  •  5 person-  $ 91,394.00 
  •  6 person – $ 99,794.00 
  •  7 person – $108,194.00 
  •  8 person – $116,594.00  

If your average household income exceeds the above amounts, you may still qualify for Chapter 7 relief. In order to do so, you must pass The Means Test in bankruptcy. The Means Test is a calculation your bankruptcy attorney performs to show the court that even though your household income exceeds the median income, you should still be entitled to Chapter 7 relief. It represents a fairness approach for household which have significant income but also have significant ongoing expenses which make that income insufficient to survive.

Chapter 13 Income Limitations

If you can’t qualify for Chapter 7 from an income perspective, you can consider Chapter 13. Chapter 13 allows debtors with too much income for Chapter 7 to still receive bankruptcy relief, in exchange for paying back a small percentage of debt to creditors. That percentage is based on your household budget. As a result, income also plays a role in a successful Chapter 13 filing; however in Chapter 13 you are actually trying to show the court that you do have enough income to be able to afford a Chapter 13 payment.

While your bankruptcy attorney can more thoroughly explore Chapter 13 with you, essentially, you have to show the court that you can afford your normal household expenses plus a small amount to go to your creditors in Chapter 13.

Chapter 11 Income Limitations

In Chapter 11, which is the designated chapter for a true business reorganization of debt, there are no income limitations. Chapter 11 bankruptcy is an option for debtors who have a profitable business which will continue to produce income, but which needs some time to restructure its debt with creditors in order to continue to operate. In a Chapter 11 bankruptcy, your attorney will approach each creditor individually, and negotiate an arrangement with that creditor regarding debt repayment during Chapter 11.

In Chapter 11—much like Chapter 13—your creditors are placed into classes, including priority, secured and unsecured. In order for your Chapter 11 bankruptcy to proceed, a majority of creditors in each class must agree to the plan being proposed by your Chapter 11 bankruptcy attorney. Chapter 11 allows you to:

Continue Operating Your Business, Uninterrupted

Propose a Reorganization Plan

Bind Your Creditors To A Debt Repayment Plan

It’s important to keep in mind that roughly 80% of Chapter 11 cases either dismiss or convert to Chapter 7. These statistics should caution any debtor against pursuing Chapter 11 unless the repayment plan is feasible and likely to be met. A conversion from Chapter 11 to another chapter can also result in a successful ending for the debtor—which is the ultimate goal.

Debt Limitations When Filing Bankruptcy

In Chapter 7 bankruptcy, there are no debt limitations. Typically, if you’re considering filing Chapter 7, your primary concerns will be whether your income is too high, and whether you are able to exempt your assets.

In Chapter 13 bankruptcy, there are debt limitations. You must have less than $1,257,850 in secured debt. This would include any debt secured by property such as your home, automobile, or other personal property. You must also have less than $419,275 in unsecured debt, as of April of 2019.

In Chapter 11 bankruptcy, there are no debt limitations.

Speak With A Charlotte Bankruptcy Lawyer Today

If you are considering filing bankruptcy, it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.

Further Reading

If this article explaining business bankruptcy was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.