Business Bankruptcy in Arizona: 6 Facts for a Phoenix Chapter 11 or Chapter 7

Determining whether to file for Chapter 7 or Chapter 11 is different from the consumer’s Chapter 7-versus-13 question. The short answer: if the business will survive, you want a Chapter 11, and if it won’t survive, you want a Chapter 7. While in Chapter 7 your company will liquidate, a Chapter 11 bankruptcy will only result in liquidation of the business as a last resort. Here are six facts about business bankruptcy to help you decide what to do.

The Business Generally Ceases Operations

In Chapter 7, the business generally ceases operations, and the trustee will then determine which assets can be sold to help repay creditors. Chapter 7 bankruptcies only discharge the debts of individuals; corporate entities like LLCs and corporations keep their debts. However, a 7 can be useful to conduct an orderly sale of the company’s assets. What it won’t do is reorganize the company and keep it going. Filing for a Chapter 7 in Arizona will cost the petitioner $338. In Chapter 7, 21 to 40 days after you file, you meet the other people in the bankruptcy case. At this meeting, the trustee or trustee’s staff person asks questions of someone from your company under oath.

Restructure the Company to Make It Profitable

Unlike a Chapter 7, an 11 bankruptcy lets the company continue operations and keep its assets, either to sell it in an organized way or restructure the company to make it profitable. Chapter 11 permits the business owner to create a reorganization plan. The business may work with the creditors to create a plan that lets it reduce certain debts, give it more time to pay off loans, or get out of long-term leases it no longer needs. Corporate or LLC management stays in place. In a regular Chapter 11, the debtor has the exclusive right to file a plan for the first 120 days of the case. Because you are seeking relief for a business, you must pay a $1,738 Chapter 11 filing fee in Arizona. Chapter 11 costs include the filing fee, quarterly US Trustee fees, and attorney’s fees.

This brings you back to the goals of the filing. If the value of your business is in the equipment, not in how it uses the equipment, Chapter 7 can be a liquidation solution. If on the other hand, you believe there is enough remaining value that the business can become profitable if only you could eliminate debt, you may be well served by seeking Chapter 11 protection. Sometimes a company’s largest assets are intangible, like brand loyalty or the promise of future developments.

Subchapter V (sounds like “Five”) is a streamlined Chapter 11 for small closely held businesses, where the debt is $3,424,000 or less, and at least half of it is for business expenses. Advantages of Sub-V bankruptcy include the ability to retain your ownership interests in the company.

As soon as a Chapter 7 or Chapter 11 case begins, the automatic stay generally prevents creditors, including banks, lenders, and government agencies, from trying to get payment. While the automatic stay protects you from having to deal with each and every creditor on an individual basis, payments made by the debtor to ordinary creditors in the 90 days before filing the petition can be undone by the bankruptcy trustee. The time period is extended to one year for transactions with insiders like owners or relatives.

Remain Personally Liable

This is a big one for small businesses, where the owners think that “corporation” means “I’m off the hook for its debts.” A business bankruptcy, whether 7 or 11, will deal with the business debts, but does not result in discharging individual’s debts, like personal guarantees. The owner will remain personally liable for any debts that s/he guaranteed. Owners can also be personally liable for trust fund taxes, which are payroll taxes withheld from employee wages. The IRS can go after “responsible persons” who willfully failed to pay them, for a penalty equal to 100% of the trust fund taxes. That penalty is called the trust fund recovery penalty.

What the owner can do: Is the owner ready to hammer out a plan for repayment over time? Should the owner file their own bankruptcy, as a person? In a sole proprietorship business, because the company is not a separate legal entity, its debts are the debts of the owner. A sole proprietor may file in Chapter 7, 13, or 11 as a person, depending on eligibility. If that’s you, you should get personal bankruptcy advice as well as advice on business bankruptcy.

In a bankruptcy court in Arizona, a non-attorney cannot file papers in behalf of a corporation or limited liability company. That means that even if you’re willing to put up with the risk of doing your own bankruptcy case, your company or LLC can’t use your help. Get a lawyer (and you should, anyway.)

In the end, your question comes down to whether your business will survive, and if it is worth it to try. A Chapter 11 may allow you more time to stabilize the business. However, not every business can be saved in bankruptcy, or is worth saving in a bankruptcy.

So if the company can be made profitable, or has value in a sale, seriously consider Chapter 11 or Subchapter V. If it has no realistic future, the choices are Chapter 7 or an orderly wind-down outside of bankruptcy.