Most likely, bankruptcy would affect a business partner. However, the effects are almost all positive.
Sometimes, liquidating a failing business is the best course of action. This issue is very common, as only a small percentage of new businesses survive past the first five years. A failed business does not necessarily mean that you and your partners are poor planners or businesspeople. It just means that, for whatever reason, a particular concept did not work out.
A Minnesota Chapter 7 Bankruptcy lets your partner start fresh without a bankruptcy on his/her credit record. Your partner may lose any investments, but that probably would have happened with or without bankruptcy.
Some businesses just need some time to recover from temporary downturns. A small residential real estate business is a good example. If a tenant tears up a rental house, it could cost several months and several thousand dollars to get it ready to rent again. The negative cash flow often means falling behind on a mortgage loan. Chapter 13 gives the partnership the time it needs to catch up on debts and move forward.
Chapter 13 is only an option for partnerships that are not separate legal entities, like corporations or LLCs, since only people (and not corporations) can file a chapter 13 case. A “doing business as” trade name does not make the partnership a separate legal entity. But limited partnerships and other similar arrangements may be a different story in Minnesota.
All bankruptcy filers, and their business partners, benefit from the automatic stay. Let’s return to the rent house example. Most mortgage companies begin foreclosure proceedings after just a couple of missed payments.
The automatic stay prohibits any adverse action against any property that the filing party has any interest. This stay applies to:
- Lawsuits, and
- Wage Garnishment.
A word about the automatic stay and evictions in Minnesota. The 2005 bankruptcy reform law changed the procedures in this area. If you are behind on rent, a commercial landlord obtains an eviction judgement, and you file bankruptcy, that filing probably cannot stop the eviction. So, so not wait until the last minute.
Reaffirmation, Redemption, and Repayment
In the next phase of bankruptcy, most debtors can decide which debts they will keep and which ones they no longer want to pay.
Most people reaffirm their secured debts. If the debtor violates the security agreement, which is separate from bankruptcy, a Minnesota creditor can repossess the collateral. In almost all cases, failure to make on-time payments is a clear violation of the security agreement.
The redemption option may be available for Minnesota businesses. Most startups buy almost everything on credit. Typically, things like business equipment and office furniture depreciate extremely quickly. If bankruptcy debtors can pay the current fair market value, they may be able to own the property outright.
Assume your business bought ten laptops for $500 each. A year later, they are only worth $100 each. The debtor might be able to pay $1,000 and avoid paying the rest of the $5,000 loan.
Redemption is a very complex matter that requires deep resources, excellent negotiating skills, and the advocacy skills to enforce your position. At Kain & Scott, we have all three. That’s a claim that many other firms simply cannot make.
The protected repayment period is only an option in Chapter 13. It lasts up to five years. During that time, the automatic stay remains in force. Bankruptcy debtors can erase past-due amounts on their loans while under the protection of the bankruptcy court. Typically, Minnesota creditors must accept the debtor’s income-based repayment plan.
In the business world, almost everything is negotiable. That includes the amount due on a particular debt, the repayment terms, and so on. At the time of purchase, most business buyers have very little negotiating leverage with most sellers. If they fall behind on payments, their leverage slips even more.
Bankruptcy levels the playing field for you and your partner. Most judges refer financial disputes to mediation. There, the moneylender has a duty to negotiate in good faith. That could mean a lower repayment amount or a more lenient repayment schedule. Both you and your partner benefit.
After the three Rs are resolved, the bankruptcy judge usually discharges all remaining debts. Discharge eliminates the legal obligation to repay the debt but not the debt itself. That subtle distinction gives your business partner a unique opportunity.
Either you or your partner may choose to repay some, all, or none of the debt. It’s entirely up to you. That could mean a clean break from a failed business without intricate windup procedures. Or, your partner could voluntarily repay a discharged debt to a vendor to get back in that vendor’s good graces.
In most cases, bankruptcy does not negatively affect your partner. For a free consultation with an Minnesota Bankruptcy Attorney, contact Kain & Scott. Convenient payment plans are available.