To say the last year has been challenging for all types of businesses is a major understatement. Many businesses have been struggling to make ends meet, even with state and federal programs designed to help like the Payroll Protection Program. If your business is exploring ways to survive and finding that debt payments have become more than you can handle, there are options for debt consolidation and business bankruptcy. The attorneys at RSN Law have experience with both options and we put together this article to help explain the differences between debt consolidation and business bankruptcy.
Business Debt Consolidation
If your company is paying on multiple loans, credit lines, and other debts, business debt consolidation would combine all these loans into one payment with a lower interest rate. The most beneficial time to explore debt consolidation is when your business is making money, but the payments on multiple loans or debts are just covering the interest owed and not allowing you to make progress on the principal.
Debt consolidation will not lower the amount of debt owed, but can be structured so that you only have one monthly payment to make and typically lower the interest rate and monthly payment amount so that your debt becomes more manageable for your business.
Business debt consolidation will also require your company to qualify for the new loan. This will mean that you’ll need to prove the business has assets and revenue streams to secure the loan and reliably make the new payment.
Business Bankruptcy Options
Most people are aware that there are a few different types of bankruptcy options available, but aren’t familiar with what option would be best for their business if they’ve reached the point where they don’t see other viable options. Chapter 7 and Chapter 11 can be used by corporations and partnerships without the partners or shareholders having to file for personal bankruptcy. Sole proprietors are in a different position since the business is simply part of their personal assets. They would have the option for Chapter 7, Chapter 11 or Chapter 13 and include the sole proprietorship in their personal bankruptcy.
Chapter 7 bankruptcy is geared towards a liquidation of the assets or an attempt to reorganize current debts and obligations that can no longer be met by the business operations. If the opportunity to break free from leases and contracts could provide the business an opportunity to continue operations at some scale, then Chapter 7 could be an appropriate path forward for some partnerships and corporations. Most times, Chapter 7 will be used when the business has no substantial assets and it is unlikely to have any viable path moving forward. If the business does have some remaining assets, Chapter 7 will typically involve liquidating or giving up some of those assets to help pay for the restructuring of other remaining assets.
Chapter 13 bankruptcies will typically allow your business to keep all assets while structuring a new payment plan with three to five years to pay off the court approved plan. If all payments are met during that time, any remaining debts can be discharged by the judge. Chapter 13 can be an appropriate structure for a business that faces some short term challenges that have not allowed you to keep up with debt payments and liabilities, but the business still has revenue, assets and long term prospects for success.
Small Business Reorganization Act (SBRA)
In a previous article, we covered the 7 key things to understand about the Small Business Reorganization Act (SBRA), commonly known as Subchapter V of Chapter 11, and how it could be a possible lifeline for small businesses struggling to make ends meet this year. The main goal of the SBRA was to lower the costs of filing for business bankruptcy and streamline the process. Originally, it applied to businesses with debts less than $2.7 million, but that was expanded to cover businesses with up to $7.5 million in debts as part of the CARES act passed by Congress in 2020.
Subchapter V incorporates some aspects of Chapter 13 so that a business can propose a three to five year plan that involves using the disposable income to pay structured debt payments while maintaining other normal expenses and operations. Chapter 11 would typically require all creditors to approve a debt restructuring plan, but Subchapter V allows for a cramdown of existing debts as long as the payments are fair and reasonable among all creditors.
Review Debt Consolidation and Bankruptcy with an Arizona Bankruptcy Attorney
RSN Law attorneys’ have decades of experience with debt consolidation and bankruptcy law in Arizona. Our attorneys can review the current situation for your business and help determine all available options. We can help guide you through the best options to restructure your debt or pursue bankruptcy protection if required. Contact us today at 480-712-0035 or make an appointment online for an initial consultation.
RSN Law intends this article to be for informational purposes, not to be relief on a specific legal matter, and does not create an attorney-client relationship.