calculator and ledgerThis is the next post in a series of articles discussing small business bankruptcies in Olympia and Tacoma, Washington. Our previous post discussed the streamlined Chapter 11 process available to some small businesses under relatively new rules, known as Subchapter V bankruptcy. The new approach was implemented to expedite the Chapter 11 process and make it more affordable for small businesses, who otherwise may have chosen to liquidate their assets and close rather than restructure. Even with the new rules, Chapter 11 may not be the right option for every business. In this post, we will address alternatives to the Chapter 11 bankruptcy process. If you need assistance, contact our office today to speak with an Olympia attorney.

In addition to Chapter 11, other types of bankruptcies may be available to Washington businesses. Which other options are possible will depend largely on which type of business entity is seeking protection. Chapter 7 is the most common alternative to Chapter 11 for corporations, partnerships, or limited liability companies. In Chapter 7 bankruptcy, the business assets are liquidated through the court process and the proceeds of the liquidation are used to pay off the company’s creditors. Certain assets may be exempted from liquidation under specific provisions of state or federal law. Unlike Chapter 11 bankruptcy, the business does not continue operations during or after the process.

Chapter 13 bankruptcy may be another option for an individual operating a sole proprietorship. (Corporations, partnerships, or limited liability companies may not file under this Chapter.). Under Chapter 13, an individual may restructure personal and business debts in exchange for payments to their creditors over three to five years. After the payments have been made as agreed, the debts are discharged. The primary benefit of Chapter 13 bankruptcy is that the debtor is not forced to liquidate their assets during the process. For a sole proprietor, the debtor may continue to operate their business similar to a Chapter 11 filing.

The distinctions between each of the bankruptcy chapters can be complicated. An experienced bankruptcy attorney can assist you in determining the potential advantages and disadvantages of each. Your lawyer can also explain the applicable eligibility requirements.

For example, the owner of a local restaurant is forced to close its doors as a result of the COVID-19 pandemic. After several months of closure, the business is unable to meet its financial obligations to creditors. Determining which type of bankruptcy would work best for the owner and the business in this situation is complex and may require consultation with an attorney.  If the business is a corporation or an LLC, the business would have to file for bankruptcy, and the owner may not need to file for bankruptcy at all. If the owner wanted to keep operating the business, the business would need to file a Chapter 11 bankruptcy. This would allow the business to continue to operate while negotiating a repayment plan with its creditors.  Or, the business could file a Chapter 7 liquidation bankruptcy which would result in all of the business assets being sold and the proceeds used to pay the business’ creditors. The owner would get to keep their personal assets since it was the business that filed for bankruptcy.

If the business is a sole proprietorship, the owner may be able to seek bankruptcy protection under Chapter 7 or Chapter 13 for both personal and business debts. Which Chapter is available or best for the owner to use depends upon their income and debt levels.Because the owner and the business are one in the same,  under Chapter 7, both personal and business assets may be liquidated and the proceeds used to pay both business and personal debts. Under Chapter 13, on the other hand, the owner is able to develop a repayment plan that allows them to keep valuable assets, such as a home, and potentially reopen the business in the future. Because each of these options will have a significant impact on a business and potentially its owners, it is imperative to discuss your options with a bankruptcy attorney.

Ben Cushman is an Olympia bankruptcy lawyer. He understands that the decision to seek bankruptcy protection is a difficult one and treats his clients with the respect they deserve. Contact our office today to schedule an appointment. The firm also services the Thurston County cities of Lacey, Tumwater, and Yelm, the Pierce County cities of Tacoma, Puyallup, and Lakewood, the Lewis County cities of Centralia, and Chehalis, the King County cities of Seattle, Auburn, Bellevue, Burien, and Federal Way, as well as other areas in Washington, including Grays Harbor, Mason, Cowlitz, and Pacific Counties.