Some entrepreneurs operate their business in their own name or under a dba, and will chose a Chapter 11 bankruptcy for primarily business purposes. Others own a separate business entity but have signed guarantees of the business debt in addition to their mortgage and consumer debt. In either case, a Chapter 11 bankruptcy may offer these individuals advantages over liquidation, and is sometimes the only bankruptcy option available to them.
Entrepreneurs must often explore bankruptcy options for both their personal affairs and one or more business entities they control. In deciding whether to file an individual bankruptcy case, a corporate bankruptcy case, or both, entrepreneurs face some unique challenges and opportunities:
- In some cases, the majority of their debt is not “consumer debt” but represents corporate guarantees or other business debts. This may allow a high-income entrepreneur to qualify for a Chapter 7 liquidation where another debtor with primarily consumer debts would be restricted to relief under Chapter 13 or Chapter 11.
- An entrepreneur’s stock, or other ownership interest in a business, is a non-exempt asset which can be sold by the Trustee in a Chapter 7 liquidation case. Many individuals who qualify for a Chapter 7 want to keep their interest in the business, and will thus explore options under a Chapter 13 or Chapter 11 bankruptcy. If they do not qualify for a Chapter 13 bankruptcy, they may chose to file for reorganization under Chapter 11 .
- A business entity which files for Chapter 11 bankruptcy must conform to the “absolute priority rule.” Under this rule, owners can only retain their interest in the company if the plan provides for full payment of all of its creditors. Small business owners thus often face a far different decision than a large corporation. When a large corporation files for Chapter 11 bankruptcy, it can sometimes propose to pay creditors pennies on the dollar even if mostly anonymous shareholders lose their stock. A small business owner is much more likely to propose full payment to all its creditors.
Thus, an entrepreneur often must consider both personal and business issues when deciding whether to file bankruptcy and the appropriate bankruptcy chapter under which to seek relief.