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How to File Business Bankruptcy in Pennsylvania

Adams Kearney Law June 12, 2024

Running a small business can be incredibly rewarding, but it also comes with its fair share of challenges. Sometimes, despite best efforts, financial difficulties arise that make it impossible to continue operating.

In these cases, filing for bankruptcy may be the most viable solution. Understanding the bankruptcy process and seeking legal guidance can help you make informed decisions and protect your business's future. 

Understanding Bankruptcy for Small Businesses in Pennsylvania

Bankruptcy can offer a fresh start for businesses struggling financially. However, before filing for bankruptcy, consider these factors: the long-term viability of your business, the impact on your personal finances, and the possible alternatives to bankruptcy, such as debt restructuring or sale of the business. 

Once you've decided to file, know that there are three primary types of bankruptcy that small businesses in Pennsylvania can consider: 

Chapter 7 Bankruptcy 

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves selling off a business's assets to pay off debts. This option is typically chosen when a business has no viable path to continue operations. The process is straightforward, but it results in the closure of the business. 

Chapter 11 Bankruptcy 

Chapter 11 bankruptcy, also known as reorganization bankruptcy, allows businesses to restructure their debts while continuing operations. This option is more complex and suitable for businesses with potential for profitability post-restructuring. It provides an opportunity to renegotiate terms with creditors and develop a repayment plan. 

To be eligible for this type of bankruptcy, the small business must demonstrate a feasible plan for reorganization and repayment. 

Chapter 13 Bankruptcy 

Although primarily for individuals, Chapter 13 bankruptcy can be an option for sole proprietorships. It involves creating a repayment plan to pay off debts over a period of three to five years. This option is less common for businesses due to its restrictions on debt limits. 

To be eligible for Chapter 13, which is for sole proprietors, the small business must have a stable income to adhere to a repayment plan. 

Preparing to File for Bankruptcy

Preparation is key to navigating the bankruptcy process smoothly: 

Collect all relevant financial documents, including balance sheets, income statements, tax returns, and a comprehensive list of creditors. Accurate documentation ensures a transparent process and helps your attorney build a strong case. 

To safeguard your assets, stop using business credit cards and accumulating new debt, separate personal and business finances, and consult with a bankruptcy attorney to understand asset protection strategies. 

The Bankruptcy Filing Process

To file for bankruptcy, follow these essential steps: 

  • Consult with a bankruptcy attorney: Seek legal advice to understand the specifics of your case and determine the most suitable type of bankruptcy.  

  • Complete credit counseling: Enroll in a credit counseling course from an approved provider within 180 days before filing your case. 

  • Prepare and file your petition: Complete the necessary bankruptcy forms, including the petition, schedules of assets and liabilities, and statement of financial affairs. Your attorney will file these documents with the appropriate bankruptcy court. 

  • Automatic stay implementation: Once the petition is filed, an automatic stay goes into effect, preventing creditors from taking collection actions against your business.  

  • Meeting of creditors (341 Meeting): Attend the mandatory 341 meeting, where creditors can ask questions about your financial situation and the details of your bankruptcy petition. 

  • Develop and submit a repayment or liquidation plan: Depending on the type of bankruptcy filed, work with your attorney to create a feasible repayment plan (Chapter 11 or 13) or prepare for asset liquidation (Chapter 7). 

  • Confirmation hearing (Chapter 11 or 13): Attend the confirmation hearing, where the court will approve or deny your repayment plan. Ensure all necessary modifications are made for plan approval. 

  • Debt discharge or plan completion: For Chapter 7, once assets are liquidated and debts paid, the court will discharge remaining eligible debts. For Chapter 11 or 13, adhere to the repayment plan until completion, after which eligible debts will be discharged. 

By following these steps, businesses can navigate the bankruptcy process with greater clarity and efficiency. 

The Impact of Bankruptcy on Small Businesses

Bankruptcy can have both immediate and long-term effects on your business: 

  • Business operations. Chapter 7 bankruptcy results in business closure, while Chapter 11 and Chapter 13 allow continued operations under a restructured plan. 

  • Employees and stakeholders. Employees may face layoffs or changes in work conditions. Communicate openly with your team and stakeholders to manage expectations. 

  • Business recovery. Post-bankruptcy, focus on rebuilding your business. Create a realistic budget and stick to it. Explore new revenue streams. Engage with financial advisors to prevent future financial crises. And more. 

By understanding the nuances of each bankruptcy type and following a structured process, small businesses in Pennsylvania can navigate financial difficulties and work towards a more stable future. 

Seeking Legal Advice and Support

Working with a knowledgeable bankruptcy attorney can make a significant difference. An attorney can help you understand your options, prepare necessary documents, and represent you in court. Their knowledge and skill helps create a smoother process and higher likelihood of better outcomes.  

When selecting a bankruptcy attorney, look for experience with small business bankruptcies, schedule consultations to discuss your case and assess their approach, and check reviews and testimonials from previous clients. 

Take Your Next Steps Forward

Filing for business bankruptcy in Pennsylvania is a complex process that requires careful consideration and preparation. Understanding the types of bankruptcy, eligibility criteria, and the impact on your business can help you make informed decisions. Working with a qualified bankruptcy attorney ensures you receive the guidance and support needed to navigate this challenging time. 

At Adams Kearney Law, we have a team of skilled attorneys ready to assist you with your bankruptcy needs. If you have any questions or need personalized legal advice, don't hesitate to reach out to us. Share your experiences or questions related to small business bankruptcy in the comments below. We’re here to help.