How to File Business Bankruptcy: 8 Steps Before the Petition Is Signed

Filing the petition is the quick part. It’s the work you do beforehand that counts the most. In short, a bankruptcy filing means choosing a bankruptcy chapter, then selecting an attorney, who goes on to file the petition on your behalf. The complex part of filing bankruptcy is everything before and after the actual filing.

Chapter 11 Bankruptcy

Corporations and partnerships usually have the choice between Chapter 7 or Chapter 11 bankruptcy. Chapter 7 is liquidation, meaning the business ends and its assets are sold to repay creditors. Chapter 11 lets you keep the business going while working out a repayment plan with creditors. If you’re filing on behalf of a sole proprietorship, you can file under Chapter 7, Chapter 11, or Chapter 13. The corporation or LLC is not discharged in Chapter 7 liquidation; the discharge is only for individuals. The law sets a ceiling on how much you can have in the way of unsecured debt (under $526,700) and secured debt (under $1,580,125) and still file under Chapter 13.

Subchapter V makes things easier for small businesses in Chapter 11 reorganizations. The process is much faster. If your total debts don’t top $3,424,000 - counting at least half of them from your business - you can file under Subchapter V. Then you must file a reorganization plan within 90 days of the filing date. Only the debtor can file a reorganization plan. A status conference is usually set within 60 days of the filing date. But you need to be ready to file at the starting gate to shorten the clock. This takes preparation.

Consulting with an Attorney

Lawyers are a critical necessity for business bankruptcy, whether you file under Chapter 7 or Chapter 11. This is true for businesses that file as corporations, LLCs, or partnerships. Only individuals can file without lawyers. Try to interview a few attorneys, then choose the one you like the best.

Sole proprietors filing bankruptcy as individuals must go through credit counseling with an approved agency in the 180 days before filing. Most people don’t realize this, but when you file a Chapter 13 bankruptcy, you must file any tax returns you haven’t filed in the four years before filing by the day before the first creditors’ meeting.

Before consulting with an attorney, gather all your business documents, including your loan paperwork, creditor documents, tax forms, account records, and corporate or LLC registration documents. Being completely honest with your attorney is vital to avoid negative surprises. For an accurate picture of the debt, you need a clear idea of what’s already on the books. Look at bank, credit card, and other loan balances. Calculate how many unsecured creditors are owed. Make a list of collateral and see if the sales value covers the debt. Check to see whether all personal guarantees are spelled out in leases and contracts. To get a real picture of your business, don’t forget to include pending lawsuits and collections deadlines in your review, along with tax debts, accounts receivables, bank balances, payroll needs, and insurance policies.

A bankruptcy trustee will look closely at your finances in the weeks and months before filing. The bankruptcy trustee can generally undo payments and transfers made by a company that’s already insolvent within 90 days, one year if the transfer was made to an insider. If your company pays one creditor to the exclusion of another creditor, that payment can be a preference transfer. But it only applies if you paid more than the creditor would have received through Chapter 7, and exceptions such as ordinary-course payments can apply. Use an attorney if you want to try the complex maneuver of repaying a loan before a bankruptcy.

Chapter 11 Filing

In a Chapter 11 filing, you will need to file schedules of your assets and debts, income and expenses, as well as a statement of financial affairs and a list of executory contracts and leases. If you are filing as a small business debtor or under Subchapter V of Chapter 11, you will need to supply a balance sheet, a cash flow statement, and a statement of operations, plus your latest federal tax return, or explain under oath why any are missing. A Chapter 11 filing costs $1,738 total: a $1,167 filing fee plus a $571 administrative fee.

Before filing any bankruptcy, get your books of account up to date. This is important because there will be questions afterward. A business that files Chapter 11 is usually allowed to keep running. File your monthly operating reports with the bankruptcy court and be ready to answer questions at the initial 341 meeting. Don’t wait until the last minute to gather up your payroll files, receivables, and profit and loss statements.

Build a short-term budget: It’s easy to underestimate how much cash you need to make it through the coming months. Remember to include attorney fees for the Chapter 11 filing and the cash you need to keep up on existing business expenses. Leave extra for any unexpected needs. While trying to arrive at these figures, be realistic. Filing a bankruptcy doesn’t stop you from having to make payroll, pay insurance premiums, and buy inventory. Chapter 11 does not discharge taxes that were withheld from payrolls. Ask the lawyer how you will cope with day-one issues before filing your Chapter 11. The beginning of a Chapter 11 filing can be a juggling act while you get permission from the bankruptcy court to use cash collateral, pay payroll, pay utilities, or prevent a pending foreclosure or repossession.

Going through the proper steps beforehand helps keep the bankruptcy process smooth.