Managing Attorney
When business owners find themselves in heavy debt and unable to pay their basic expenses, the stress can be overwhelming. Small business owners in particular have to worry about not only making ends meet for themselves and their families, but about the plight of their employees. For many Texas businesses, the only viable option is bankruptcy.
Bankruptcy is not a word that generally conjures up reassuring thoughts, but the reality is that it can provide significant assistance and a path forward for businesses that are struggling under the weight of excessive debt. Not all bankruptcies are the same, and there may even be alternatives that are better suited for your company. The most important step you can take is to work with the Houston business lawyers of Capstone Legal Strategies.
What follows are some of the most common forms of bankruptcy for Texas businesses.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy for a business is a liquidation process in which a company that can no longer pay its debts ceases operations and has its assets sold to repay creditors. Unlike reorganization bankruptcies (such as Chapter 11), Chapter 7 does not allow the business to continue operating. Instead, a court-appointed trustee takes control of the company’s assets, sells them, and distributes the proceeds to creditors in a specific priority order. Once the assets are liquidated and debts are addressed as much as possible, the business is typically dissolved permanently.
This type of bankruptcy is most common for small businesses or corporations that have no viable path to financial recovery. One important distinction is that LLCs and corporations do not receive a discharge of debts under Chapter 7—only individuals do. If business owners personally guaranteed loans or engaged in improper financial practices, they may still be personally liable for certain debts even after the business is liquidated. Chapter 7 can provide an orderly and legal way to shut down a failing business, but it does not necessarily shield owners from all financial responsibility.
Chapter 7 is common for business debts such as:
- Lease obligations
- Loans
- Contract obligations
- Credit card bills
- Utility bills
- Outstanding and overdue accounts
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a reorganization process that allows a business to continue operating while restructuring its debts under court supervision. Unlike Chapter 7, which leads to liquidation, Chapter 11 gives companies the opportunity to renegotiate contracts, modify debt obligations, and implement a repayment plan to become financially stable. During this process, the business typically remains in control of its operations as a debtor-in-possession (DIP), but major financial decisions require court approval. This type of bankruptcy is commonly used by corporations and partnership taxed businesses or those with potential for recovery, allowing them to stay afloat while addressing financial difficulties.
One of the key benefits of Chapter 11 is the automatic stay, which halts collection efforts, lawsuits, and foreclosures, giving the company time to reorganize. The business must propose a reorganization plan, which creditors vote on before the court approves it. If successful, the company emerges from bankruptcy with a more manageable financial structure. However, Chapter 11 is complex, expensive, and time-consuming, making it a challenging option for small businesses unless they qualify for the Subchapter V streamlined process, which simplifies procedures for smaller entities.
The bankruptcy attorney, working with an experienced business lawyer, submits a plan to the bankruptcy court that offers a realistic strategy for paying back creditors. The creditors have the opportunity to review the plan and either approve or reject it, and the court will need to sign off on the plan as well. Once implemented, the business can continue operating and begin paying creditors as set forth in the plan. Chapter 11 is ideal for a business that continues to earn revenues and has a viable chance at surviving.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization bankruptcy designed for individuals and sole proprietors rather than businesses. It allows debtors to restructure their debts and repay them over a three- to five-year period under a court-approved plan. Unlike Chapter 7, which involves liquidation, Chapter 13 lets debtors keep their assets, including homes and businesses, while making manageable payments based on their income. This type of bankruptcy is ideal for individuals who have a steady income but need relief from overwhelming debt.
A key benefit of Chapter 13 is the automatic stay, which stops foreclosure, wage garnishments, and creditor collections while the repayment plan is in place. At the end of the repayment period, remaining unsecured debts (such as credit cards or medical bills) may be discharged, meaning the debtor is no longer responsible for paying them. Chapter 13 is often used by sole proprietors to reorganize business debts while continuing to operate, but it is not available for LLCs or corporations.
Are There Alternatives to Bankruptcy?
Bankruptcy is a serious decision that should only be made after consultation with an attorney. Fortunately, there are several alternatives you may wish to consider instead:
- Debtor and creditor workout: Put simply, this means the business renegotiates the debt directly with its creditors. The debt can be restructured in whole or in part by a composition (the creditor agrees to accept partial repayment) or the creditor may offer an extension of the deadline to repay the debt.
- Assignment for the benefit of creditors: This is essentially liquidation under Texas state law and acts as an alternative to Chapter 7 bankruptcy. The company’s assets are voluntarily transferred to an independent third-party assignee who liquidates assets to repay creditors.
- Forbearance: A business with a temporary cash flow problem may obtain a forbearance. With a forbearance agreement, the debtor and creditor agree to reduce, suspend, or postpone payments for a limited period of time. In exchange for a forbearance, the debtor may have to give up the right to fight the creditor’s collection efforts and possibly make other concessions.
Explore Your Business Bankruptcy Options Today
If your Texas business is faced with crippling debt and there seems to be no way out from under it, speak with the team at Capstone Legal Strategies. We can review the above bankruptcy options in more detail and discuss potential alternatives as well. Our firm is committed to seeing you through this process, so connect with us today.