Small Business Bankruptcy

Financial difficulties are not exclusive, and any individual can face bankruptcy despite their financial capabilities. Bankruptcy is the process of legally declaring a person's incapability or their business's inability to pay any outstanding debts. Specific circumstances can lead to the filing of a small business debt discharge, and the San Diego Bankruptcy Attorney is on standby to take an applicant through this crucial process in California. To save a small business from insolvency and closure, our capable bankruptcy lawyers will provide information and undertake the legal aspects on behalf of the small business owners.

The Background of Bankruptcy Laws

The term Bankruptcy refers to the legal process by which the resolution of debt issues can be settled between debtors and creditors. There are many forms of bankruptcy allowed by law, and a small business owner must have relevant information concerning each form of bankruptcy before deciding on the course of action. A business owner who is not able to pay their creditors must, therefore, peruse the Bankruptcy Code of California that establishes this law. As early as 1800, there were attempts to create a universal bankruptcy law, which were amended and repealed into the Nelson Act in 1898.

This Act gave businesses the right to discharge debts and also extended these provisions to consumers and was in effect through 1934 up until 1978. The Bankruptcy Code, a much broader enactment was granted by Congress, empowered by Article 1 of Section 8 of the Constitution. These bankruptcy rules have gone through numerous amendments to sustain the governing of all US bankruptcy matters. Each bankruptcy court, however, conducts cases according to the merits and criteria that are unique for each small business. The Federal Rules of Bankruptcy Procedure were passed by the U.S. Supreme Court to generalize the process in the entire judicial system.

How Small Business Bankruptcy Courts Work

There is a dedicated court in the US justice system that handles bankruptcy cases exclusively in all of the 94 United States judicial districts. Three of these courts are in San Diego and have at least one bankruptcy court, where a judge can make decisions that entail a small business's eligibility and any possible discharges of the debt. The court might appoint a trustee to administer the bankruptcy proceeding; who will initially require that the small business meets the stipulated chapters 7 or 13 requirements.

Other types of bankruptcies can also be administered this way, but the two mentioned chapters make explicit provisions for small or private enterprises. Small business rarely benefits from a bankruptcy filing under section 7, though the ability to keep the doors open is available. A sole proprietor or partner in accountancy, fitness instruction or a freelance writer or small businesses that sell skill more than product will mainly find chapter 7 more suited to their legal needs. A sole proprietor and partner in a small business have all debt responsibility including personal debts. The small business that files under this chapter gets a reprieve from all liability and the exemptions indicated therein will protect the entrepreneur from continuing to provide service.

A small business facing hard times or weathering economic storms needs to stay afloat, instead of closing down. An enterprise that is profitable and has assets that amount to more than the liabilities must retain a San Diego bankruptcy lawyer when the suppliers and creditors come knocking. Legal representatives will file for bankruptcy according to the beleaguered entrepreneur to allow an automatic stay to repossession. Unless there's an objection to this proceeding on the part of the debtor, court appearances are quite minimal. At the initial confirmation of bankruptcy plan hearing, a chapter 13 debtor appears before the judge while the trustee convenes other informal meetings with the creditor. This is conversant to section 341 of the bankruptcy code, for which these conferences are called 341 sessions. 

The Primary Goals of the Small Business Bankruptcy Process

Particular debts can become a heavy burden and credit consuming small businesses may need a legal alternative to solve these issues. The US Supreme Court's description of bankruptcy in 1934 follows along the lines of giving honest small businesses with no capabilities a clear opportunity for effort and protects them from pressure. A business proprietor that declares bankruptcy is also provided an order which spells personal liability for a creditor or their collection agencies that continue to harass them.

In San Diego, the required documentation is vital for a small business bankruptcy declaration. These documents include bank account(s) details, asset ownership proof, tax returns filed, and income verifications. A small business owner filing bankruptcy must attend counseling service for credit management that is instituted by California law before qualification of a declaration.

On completion of this program and in light of the debt awareness offered, the small business owner is more empowered to decide for or against a bankruptcy declaration. Debt counseling program attendance is mandatory, and a bankruptcy declaration can be dismissed for the defendant small business which violates it. To succeed in all these requirements, a small business bankruptcy declarer needs a San Diego bankruptcy attorney to assist in the process.

Types of Bankruptcies that are Suitable for Small Businesses

Depending on the status of debt that a small business owes; the term bankruptcy is a very individual case specific. Under the US Bankruptcy Code's rules and procedures, several instances of bankruptcies are provided for. Creditors for whom a small business files bankruptcy against now have a springing board from which to launch reactive actions. Litigation may ensue arising from partner disputes, liabilities of ownership and fraud. Important considerations must, therefore, be made by the small business proprietor to which chapter to file bankruptcy under.

Chapter 7 Bankruptcy

Liquidation is the term given to chapter 7 bankruptcies where the debtor's assets are made liquid or sold for cash to settle a creditor's debt. Assets may, however, be liquidated along certain limitations as stated in the Bankruptcy Exemptions for California under section 704. A bankruptcy declaration under chapter seven for a small business may mean closing down as assets are liquidated. Exceptions, however, occur for the business owner's personal property such as private homes, vehicles, food, clothing, and equities of up to $75,000. Personal Jewelry or art heirlooms of up to $8000 are also exempt from a small business liquidation.

Other Chapter 7 Small Business Bankruptcy Exemptions

Building materials or business improvements valued at $3,200 and any health aids the proprietor may be using cannot be auctioned or sold off to repay debts. Social services bank deposits up to $3,200 or other public benefits of up to $1,600 together with wages and pensions are also protected. Other exemptions may include any funds that are held in escrow, burial land or wages of up to 75 % paid within 30 days of filing bankruptcies. In cases where there are no or little exemptions, such as a no asset case, the creditor holding an unsecured claim does not receive the owed proceeds unless they file a proof of claim. Eligibility or means test was instituted to the bankruptcy code to determine whether or not a small business debtor is within the capability vestiges for filing under chapter seven.

A hearing for chapter 7 is held a month or two after the bankruptcy petition is filed, and the decision for qualification is made then. The court-appointed trustee makes determinations based on factors that include the small business income assessment and others.  Any higher income or liquefiable assets that do not meet the requirements will be detrimental to the trustee's decision to qualify or disqualify a small business filing under chapter 7. On qualification of a chapter seven declaration, the trustee is empowered to seize the small business's assets and liquidate them to recover the debts. A percentage commission of the proceeds from small business liquidation goes to the notary trustee for services rendered.

Chapter 11 and Small Business Bankruptcies

Chapter 11 is called the restructuring or reorganization law that provides a form of bankruptcy that allows a small business to continue operating while it repays its debts to creditors. Although it is ideal for corporations with substantial assets and huge liabilities, limited liability companies and partnerships, small businesses can also apply for bankruptcy under this chapter.  A debt repayment plan is applicable in most cases with a discharge of the debt coming after the final clearance of owed amount(s). A bankruptcy attorney makes the final motion on behalf of a small business owner or partner. This involves the discharge of the remaining debt or balance and effectively bars creditors from further debt collection.

Chapter 13 bankruptcy regulates the small businesses that are involved in farming, fishing, and other family-oriented activities. This chapter, on the other hand, allows the retention of certain small business assets and a plan of payment is agreed on with creditors. The repayments may take place over some time with the court's assistance depending on the bankruptcy code. Any outstanding debts are discharged once payment has been completed under chapter 13's plan.  This is better suited to small business debtors who are confident of regularity in profits. Chapter 13 has similar exceptions as chapter 7 where the business proprietor or partner can retain personal assets like houses and vehicles. A repayment plan is usually worked out instead of liquidation, and this can be anywhere from three to five years.

The Process of a Small Business Bankruptcy Declaration

After a hearing of confirmation, based on requirements required by the Bankruptcy Code, a small business filing under chapter 7 or 13 pays the creditor(s) through a court-appointed trustee. The court may either approve or reject the repayment plan, and a debt discharge is only allowed after the small business debtor has completed all payments. Most small enterprises filing under chapter 13 bankruptcy are those that their status doesn't allow to register under other routes. Chapter 7, for instance, allows for quick debt discharge and resolution; while chapter 13 exceeds the period of repayment.

This gives a small business a grace period to reorganize their terms of credit, allowing for up to five years. A payment plan is agreed upon between the business and the court-appointed trustee, mostly in weekly or monthly installments. A regular income source is essential with the trustee examining business profitability keenly for a chapter 13 declaration. Assets that are secured get a reprieve from repossession unlike chapter 7, until the completion of the payments when the remaining debt is discharged.

Why Hire a Small Business Bankruptcy Lawyer in San Diego?

Due to the high costs of doing business in San Diego, the effects of debt can be more severe especially with little or no profit. The bankruptcy code in California allows a small business to get a fresh start and a reprieve from fiscal and creditor pressure. The legal option is available for small enterprises that find themselves deep in debt and with no foreseeable plan of escape. To enable an informed decision for favorable debt and financial terms, a bankruptcy lawyer will raise the awareness of a San Diego small business bankruptcy declarer.

A clearer understanding of the law and individual rights under the bankruptcy code in California will augment a proprietor or partner the resolve to either or not file. The laws that protect individuals such as chapters 7 and 13 are more popular with debtors since eligibility requires a lower level of income. Chapter seven is the quicker a purer form of bankruptcy but may result in the liquidation of all the debtors' assets. Chapter thirteen retains some of the debtor's significant assets and has a longer time allowance for debt clearance.

There are instances however where the small business filing of chapter 7 will be dismissed. This will leave a proprietor or partner having to file under chapter 13, this being due to disqualifying profitable income levels and the dismissal of the bankruptcy declaration is possible. The court looks at several factors in assessing small business debtors creditworthy for a decision, with references to the differences arising in bankruptcies involving;

  • Small business Mortgages and car loans
  • Past business debts
  • Property settlement debts
  • Agreement debts
  • Personal loans of partners or proprietors
  • Valuable property nonexempt
  • Secured property or prior bankruptcy

Pros and Cons of Declaring Small Business Bankruptcy

Depending on financial status, the economy or bad judgment factors, a small business may need to declare bankruptcy. Property may become repossessed with a foreclosure of business premises and a small business has to protect against harassment from collection agencies and the relief from immediate debt. A bankruptcy attorney will review a small business client's case merits to facilitate the filing of a bankruptcy. The issuance of a bankruptcy declaration relieves a small business debtor from the immediacy of owing creditors due to the automatic stay given by the court.

A Bankruptcy declaration doesn't, however, eliminate all debts; it only gives a reprieve from the undue pressure exerted by creditors. Back taxes or incurred fines owed to the state still stand, and a small business's creditworthiness may suffer from filing for bankruptcy. Future credit or loans might be out of reach for the small business that declares itself bankrupt. A declaration of bankruptcy also becomes a public record according to California law, rendering a small business subject to preying credit lending scammers.

Which Creditor Actions Can Be Taken Against a Small Business Debtor?

Under Chapter 7, 11 and 13 bankruptcies, an automatic stay is enforced to prevent creditor action against a business debt. A foreboding eviction from premises, collection agency calls or bank levies are held at bay by an automatic stay. Tax collections and other small business financial legal proceedings will however not be affected by the automatic stay. A San Diego bankruptcy attorney will assist small business in ensuring they acquire the automatic stay reprieve to save their assets from repossession.

A lawyer has skills and experience such as expediency in filing for a small business bankruptcy to get the automatic stay against creditor actions. If creditors file their suits before a small business debtor, the court might rule for the former with detrimental consequences for an entrepreneur filing bankruptcy. These and other consequences can be averted by declaring a small business bankruptcy, and depending on qualification, acquire automatic stays to fend off creditors. The understanding of how bankruptcy works under California law will ensure the protection of a small business bankruptcy declarer's personal property and assets.

Out of Court Debt Settlements

To settle the debt instead of filing for bankruptcy is sometimes the better option depending on the debt status and small business fiscal status. A settlement will also take into consideration the amount owed to calculate the percentage and plan of payment. A debt settlement may require a 20 or 50 % of the amount owed, and in other cases a single lump sum payment. Since any amount that remains after the repayment or the debt reduction amount is taxable, a settlement may cause negative IRS consequences and lead to deeper financial problems. While a small business bankruptcy filing, especially under chapter 7 is expediently completed, a debt settlement can take longer, thus, prolonging the experience.

How Can I Find A Bankruptcy Lawyer Near Me?

A small business bankruptcy filing is a long, tedious process that must be accomplished as quickly as possible no matter what else a partner or proprietor is undergoing. The actions that a creditor can take against a small entrepreneur will increase a small business's financial discomfort. The San Diego Bankruptcy Attorney is available at any time at 619-488-6168 to help make a skeletal filing; necessitating a means testing, and helping to conduct valuations of properties and assets. The legal team has comprehensive inside out knowledge of the paperwork revolving around small business bankruptcies, the chapters applicable, and exemptions that an entrepreneur qualifies for. A California small business bankruptcy lawyer is there to add success to a bankruptcy declaration and the achievement of your ultimate financial freedom.

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