What Are the Eligibility Requirements for Business Bankruptcy?

 Filing for bankruptcy is a serious decision for a business and is typically used as a last resort when a business is unable to pay off its debts. The eligibility requirements for business bankruptcy depend on the type of bankruptcy being filed (Chapter 7, Chapter 11, or Chapter 13) and the structure of the business itself (sole proprietorship, partnership, LLC, corporation, etc.). The rules vary for each type of bankruptcy, but the general eligibility requirements include financial tests, the amount of debt, and the legal structure of the business. Here’s a breakdown of the eligibility requirements for business bankruptcy under different chapters:

1. Chapter 7 Bankruptcy for Businesses

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is designed for businesses that are unable to pay off their debts and wish to liquidate their assets in order to repay creditors. While this type of bankruptcy is commonly used by individual consumers, it is also available to businesses.

Eligibility Requirements for Chapter 7:

• Debt Levels: There are no specific debt limits for businesses filing under Chapter 7, but the business must have more debts than it can reasonably pay off. The business must also have assets that can be liquidated to repay creditors.

• Business Type: Any business entity, including corporations, limited liability companies (LLCs), partnerships, and sole proprietorships, can file for Chapter 7 bankruptcy. The type of business determines the way assets are handled, but all businesses must meet basic requirements to file.

• Liquidation Plan: The business will be required to liquidate its assets to repay creditors. If a business doesn’t have any significant assets to liquidate, it may not be able to file for Chapter 7 bankruptcy.

• Discharge of Debts: Chapter 7 bankruptcy involves the discharge of most debts once the business’s assets have been liquidated. However, certain types of debts, such as employee wages or taxes, may not be dischargeable.

• No Continued Operations: Chapter 7 is generally used when the business is closing down. The business will not be able to continue its operations under this chapter, as the focus is on liquidating assets.

2. Chapter 11 Bankruptcy for Businesses

Chapter 11 bankruptcy is the most common type of bankruptcy for businesses that wish to continue operations while restructuring their debts. It allows the business to reorganize its debts and develop a repayment plan without liquidating assets. This type of bankruptcy is used by larger businesses or businesses that wish to preserve their operations.

Eligibility Requirements for Chapter 11:

• Type of Business: Chapter 11 is available to all types of businesses, including sole proprietorships, partnerships, LLCs, and corporations. Sole proprietors and individuals with business-related debts can also file for Chapter 11, though it’s less common for small businesses due to the complexity of the process.

• No Debt Limits: Unlike Chapter 13, which has specific debt limits, there are no debt limits for businesses filing under Chapter 11. This makes Chapter 11 suitable for both large and small businesses that may have substantial debt.

• Willingness to Reorganize: Chapter 11 bankruptcy is designed for businesses that want to continue operating and need time to reorganize their debts. The business must be willing to develop a plan to pay off creditors over time. The reorganization plan must be approved by the court and creditors.

• Financial Feasibility: The business must show that it has the ability to reorganize and continue operating. This includes providing financial statements and demonstrating that the business has enough revenue to continue operations during the bankruptcy process.

• Ongoing Operations: Under Chapter 11, the business can continue to operate, but it will be under the supervision of the bankruptcy court. The business must also submit a plan of reorganization that outlines how debts will be handled and repaid over time.

• Debtor-in-Possession (DIP) Financing: While going through Chapter 11, the business may need financing to keep operations running. This is known as "debtor-in-possession" (DIP) financing, and it is often a critical part of the Chapter 11 process.

3. Chapter 13 Bankruptcy for Businesses

Chapter 13 bankruptcy is primarily designed for individuals, but sole proprietors with personal and business debts may qualify to file under this chapter. This type of bankruptcy allows individuals to reorganize their debts and repay creditors over time, similar to Chapter 11 but with a simpler and faster process.

Eligibility Requirements for Chapter 13:

• Personal Debts and Sole Proprietors: Sole proprietors who have significant personal debts in addition to business debts can file for Chapter 13 bankruptcy. However, it is not suitable for corporations or LLCs, as the process is designed for individuals.

• Debt Limits: Chapter 13 has strict debt limits. As of 2022, the total unsecured debt limit for Chapter 13 is $465,275, and the total secured debt limit is $1,395,875. If a sole proprietor’s business and personal debts exceed these limits, they may not qualify for Chapter 13 bankruptcy.

• Repayment Plan: Chapter 13 bankruptcy allows individuals to reorganize their debts and make monthly payments over a 3-5 year period. The repayment plan must be approved by the court, and creditors must agree to the plan.

• Income Requirements: The filer must have a regular income source that is sufficient to make the required monthly payments. This makes Chapter 13 unsuitable for businesses without a consistent income stream.

4. Small Business Reorganization Act (SBRA) of 2019 (Subchapter V)

The Small Business Reorganization Act (SBRA) of 2019 introduced a streamlined process for small businesses to file for bankruptcy under Chapter 11. Subchapter V of Chapter 11 was created to make bankruptcy filings more accessible to small businesses by reducing the complexity and cost of the process.

Eligibility Requirements for SBRA (Subchapter V) Bankruptcy:

• Small Business Definition: To qualify for Subchapter V, the business must have total debts of less than $2.7 million, with the majority of debts being business-related (rather than personal debts).

• Operational History: The business must be actively operating at the time of the bankruptcy filing. The aim of Subchapter V is to help small businesses reorganize their debts while continuing operations.

• No Unsecured Debt Limit: Unlike traditional Chapter 11 bankruptcy, Subchapter V allows businesses to reorganize without the need for a formal creditors’ committee, reducing costs and streamlining the process.

• Reorganization Plan: The business must submit a reorganization plan that shows how it will repay creditors. The plan must be feasible and take into account the business’s ability to continue operating.

5. Sole Proprietorships and Partnerships

While the eligibility requirements for businesses vary based on their structure, certain types of businesses may face different conditions when filing for bankruptcy:

• Sole Proprietorships: Sole proprietors can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy. They can include both their personal and business debts in a single bankruptcy filing. The main concern for sole proprietors is that personal assets can be at risk in a Chapter 7 filing, as there is no separation between personal and business liabilities.

• Partnerships: Partnerships, like LLCs and corporations, can file for Chapter 7 or Chapter 11 bankruptcy. However, a partnership does not provide personal asset protection, meaning that partners may be held personally liable for the business’s debts, depending on the terms of the partnership agreement.

• Corporations and LLCs: Corporations and LLCs are distinct legal entities, which means that the owners (shareholders or members) are typically not personally liable for business debts. These types of businesses can file for Chapter 7 or Chapter 11 bankruptcy.

Conclusion:

The eligibility requirements for business bankruptcy depend on the type of bankruptcy being filed, the structure of the business, and the financial situation of the business. Chapter 7 is available for businesses that wish to liquidate assets and close down, Chapter 11 is for businesses that wish to reorganize and continue operating, and Chapter 13 is designed for sole proprietors with personal debts in addition to business debts. Additionally, the Small Business Reorganization Act offers a streamlined process for small businesses to reorganize under Chapter 11. It’s essential for business owners to understand the eligibility requirements for each type of bankruptcy and seek professional legal advice to determine the most appropriate path forward.