Sam Calvert has been practicing law in St. Cloud since 1978. He was formerly a member of the private panel of bankruptcy trustees for chapter 7 and a chapter 12 trustee. His bankruptcy practice now focuses on representing people in financial distress and individual or small businesses.
People usually think that a business bankruptcy means that the business shuts down completely. And it is true that a chapter 7 business bankruptcy means that the business is, literally, out of business.
However, a business can file a reorganization type bankruptcy instead. There are three types of bankruptcy other than chapter 7 – chapter 11, chapter 12, and chapter 13.
Chapter 11 is for typically for bigger cases, although there is a Subchapter V type of bankruptcy that is for smaller businesses. Chapter 12 is for farmers only. Chapter 13 is sometimes called the “wage earner plan”.
Each type of bankruptcy has different advantages and disadvantages.
In a chapter 7 an appointed trustee take charge of the remaining assets and liquidates them or abandons them to secured creditors. The business dies on the spot. If there are any assets that are not taken by secured creditors and that are not exempted by the individual who is the business owner, the trustee tries to turn those assets into cash and distributes the cash to the creditors. However, if the business is a sole proprietorship, the owner of the business can often keep a number of assets. There is no debt limit for a chapter 7 bankruptcy.
In a chapter 11 bankruptcy, however, the business usually tries to stay in business by re-writing its debts, paying secured creditors the value of the collateral securing the debts and paying unsecured creditors something – usually not very much. The idea is that the business is overburdened with debt, but can stay in business if if re-writes its debt and gets rid of some or most of the unsecured debt. This can be a large corporation – think Delta Airlines – or a small business, such as a small machine shop. There is no debt limit in a chapter 11.
There is also a variety of Chapter 11 bankruptcy for small businesses, called Subchapter V. The current debt limit for a Subchapter V bankruptcy is $7,500,000.00. This limit is adjusted from time to time.
In a chapter 12 bankruptcy we do that same thing as in a chapter 11 – re-write the mortgage on the land to current value and the loan on the equipment to current value– and pay the feed store and the vet and the fertilizer supplier something toward their debt. There are debt limits for a chapter 12 case – currently, $10,000,000.00. This limit is adjusted every three years. If the farmer is an individual, some assets can be protected from the claims of creditors.
Chapter 13 cases are reorganization cases for people, not corporations, so they are by definition for sole proprietorships (businesses run as a d/b/a of a person). There are debt limits to a chapter 13, currently $419,275.00 for unsecured debts and $1,257,850.00 for secured debts. These limits are adjusted every three years. In a chapter 13 you make payments to a trustee over a period of three to five years (in some circumstances, essentially due to Covid, the time period can be extended). Because a chapter 13 is just for individuals, the business owner can sometime protect assets from creditors.