Small Business Owners And Bankruptcy In Ohio

Business bankruptcy filings rose 7% last year. There are countless reasons that a small business may need to file for bankruptcy protection, from general financial pressures to industry-specific challenges. Whatever the case, if you find yourself as a business owner who can no longer sustain the company you’ve worked so hard to build, it can be crushing, and you could easily become overwhelmed. At Hausen Law, our team of Ohio bankruptcy lawyers understands small business bankruptcy inside and out and we are here to help. Here’s what to know about filing for bankruptcy in Ohio if you are a small business owner.

What Is A Small Business Bankruptcy?

A small business bankruptcy can happen for a wide range of reasons. Small businesses might file for bankruptcy if they face these common scenarios:

• Overwhelming debt obligations
• Significant lawsuit judgments
• Unpaid tax obligations
• Increase in competition
• Poor market conditions
• Loss of major clients or revenue streams

On top of these typical financial pressures, specific industries may present their own set of challenges. For instance:

• High overhead costs 
• Problematic inventory and lease obligations 
• Project delays and payment disputes 
• Regulation changes

In any of the above cases, small business bankruptcy can have serious consequences for the business as well as the business owner, depending on the type of business they operate. For instance, sole proprietorships can often put the business owner’s personal assets at risk, since the owner and the business are one in the same. 

Given the risks and regulations involved, each business category will have its own respective form of bankruptcy–chapter 7, chapter 11, or chapter 13–that applies. In general, the most fitting type of bankruptcy for a given business depends on factors like these:

• business structure
• debt liability
• business plan after bankruptcy
• staying open or winding down

Like is true for most business issues, one bankruptcy solution does not fit all. Small businesses are often sole proprietorships in which the owner assumes full legal and financial responsibility for the business–personal assets are directly tied to business debts. In other cases, a small business may be a corporation or limited liability company (LLC), which is set up as a separate legal structure and offers some protection to the individual owner(s). In each case, different bankruptcy options are best suited to offering protection to creditors and business owners alike. Let’s look at each option and see which might work best for your business.

Chapter 7 Bankruptcy (Liquidation)

Chapter 7 bankruptcy works best for businesses that are already set to close and wind down operations. In some cases the owner or partners are saddled with insurmountable debt and have no realistic path to recovery. In chapter 7 cases involving businesses, assets are sold off to pay off creditors, while many if not most unsecured debts are discharged. Sole proprietors typically implement chapter 7 bankruptcy, and may be able to discharge both business and personal debts in one filing. If your debts are mostly tied to your business, you may not need to pass the typically nonnegotiable means test. 

As is standard with a chapter 7 bankruptcy, the entire process is relatively quick, and can take just a few months to complete. In almost all cases, a business filing for a chapter 7 bankruptcy will close down, but in some rare cases where assets are low, the owner may be able to keep it running. A chapter 7 bankruptcy lawyer will be able to offer tailored advice for your specific situation.

Chapter 11 Bankruptcy (Business Reorganization)

Chapter 11 bankruptcy is most often used by business owners and partners who are looking to keep their business open and running but need to restructure their debt. This process helps in the process of renegotiating leases or contracts, reducing debt burden, and stabilizing cash flow. Instead of sole proprietorships, these businesses tend to be LLCs and corporations with viable operations. That said, sole proprietors who have debt that exceeds chapter 13 bankruptcy limits can also benefit. In a chapter 11 bankruptcy, the business continues operating under court supervision while debts are reorganized into a repayment plan.

Chapter 11 bankruptcy offers a flexible solution to resolving debt while maintaining business operations. It also protects key business assets, like equipment, inventory, real estate and more. That said, it is more expensive and complex than other available options. The bankruptcy court oversees major business decisions, creditors vote on the reorganization plan, and the plan must then be confirmed by the court. The entire bankruptcy process is also typically longer than with chapter 7 or chapter 13 bankruptcy. As is true with all forms of bankruptcy, the business is protected against creditor actions during the reorganization process. Many businesses emerge from chapter 11 bankruptcy stronger and more sustainable.

Subchapter V of Chapter 11 (Small Business Reorganization)

It used to be feasible only for large corporations to afford the costs associated with chapter 11 bankruptcy. However, the Small Business Reorganization Act of 2019 that went into effect on February 19, 2020 added a new subchapter V to chapter 11 that streamlines and expedites bankruptcy for small businesses by allowing plans to be confirmed without a creditor vote.

This provision is best suited to small businesses that want to reorganize more efficiently while also typically remaining in control of operations. You can work with a trusted Ohio bankruptcy lawyer to ensure that your business meets debt-limit requirements and qualifies as a small business debtor.

Chapter 13 Bankruptcy (Repayment Plan)

Chapter 13 bankruptcy works best for sole proprietorships in which the debtor is solely responsible for business debt–LLCs and corporations cannot file chapter 13 bankruptcy. Sole proprietors who file for chapter 13 bankruptcy choose this option instead of chapter 7 in order to keep their business open as they repay debtors. Business owners who file chapter 13 bankruptcy must have regular income that will allow for repayment. Debts are reorganized into a repayment plan lasting 3–5 years, allowing owners to catch up on taxes, mortgage payments or other debts while retaining their assets. Debt limits apply, so it is important to work with an experienced chapter 13 bankruptcy attorney in Ohio for advice unique to your business.

Financial Health and Business Bankruptcy

As a business owner, you often are exposed to personal liability in relation to your business debts, so the various bankruptcy provisions are a protection for you and your family as well as your business and creditors. That said, the bankruptcy process is known to impact credit, and you may find that your business’s bankruptcy appears on your personal credit reports and can impact whether or not you can obtain financing for any business venture in the future. That’s where Hausen Law and our credit counseling and credit repair courses come in to help. When you work with an experienced, knowledgeable Ohio bankruptcy lawyer, you can rest assured that you have the best outcome possible in your case and be able to quickly recover from credit impacts.

Involuntary Bankruptcy

When small business bankruptcies are initiated by creditors rather than the business owner(s) or partners, they are known as involuntary bankruptcy. This typically happens when creditors believe that a business is able but unwilling to pay its outstanding debts. There are very specific legal parameters that must be met to enable creditors to use this provision. Creditors first file an involuntary petition with the bankruptcy court, and the debtor has 21 days to respond. As a business owner, if this happens to you, you are able to contest the ruling or to convert it to a voluntary case. But this is best done with the advice and guidance of an experienced Ohio bankruptcy attorney, like the team at Hausen Law. If you find your business under fire by creditors trying to force you into involuntary bankruptcy, please reach out for assistance and legal counsel. We can help you to gather necessary financial documentation, review the legitimacy of the claims, and decide on next steps. 

Hausen Law Is Your Ohio Bankruptcy Lawyer

Bankruptcy does not need to be the end of your business or your own financial wellbeing. The available options can allow a business to continue operating while reorganizing its debt, or can be used to safely wind down operations while protecting your financial welfare. Because the process can be complex and challenging, it is vital that business owners consult with an experienced Ohio bankruptcy attorney. This is especially true if business and personal assets are on the line. 

When you work with the professional team at Hausen Law, we will help you to determine the right bankruptcy option for your business structure, debt, cash flow, and ultimate business goals and plans. We will help you to understand liability exposure, ensure asset protection, explain key tax implications, and inform you about any long-term business impacts. Bankruptcy can be a scary time, but it’s easier to manage with an expert on your side. Contact us to start working with our Ohio bankruptcy lawyers today!