During 2023, there was a dramatic uptick in bankruptcies in every industry, according to Epiq Bankruptcy Solutions LLC, a provider of bankruptcy data and case management services. Although the increase is most noticeable among large businesses, every hunting-industry retailer struggling with excessive business debt should consider the many options of small business bankruptcy.

Not always a bad thing, bankruptcy is a legal process available to a hunting-industry retailer — or its owner — unable to pay their debts. With a business bankruptcy, a business’s debts are eliminated or a repayment plan adopted. Creditors receive a portion of debt repayment through the debtor’s available assets. 

Although bankruptcy has the potential to wipe out all of the business’s debts, not all debts are eligible to be forgiven through bankruptcy. Debts still owed after successfully filing for bankruptcy include tax claims.

The Process

Federal courts handle bankruptcies, meaning a hunting-industry retailer owner must file a petition with their local federal bankruptcy court. The petition asks for information such as debt amounts, number of creditors, assets and liabilities, income and expenses as well as contracts and leases. Once the petition is filed, an automatic stay is issued, requiring creditors to cease their collection efforts.

The type of bankruptcy chosen and the legal structure of the business affect what happens after filing. While some business debts may be dismissed, the operation’s owner, partner or shareholder’s personal assets could be at risk.

Bankruptcy types for small businesses include:

* Chapter 7, which uses liquidation to handle a failing business. Filing under Chapter 7 means the business must close and, depending on the business’s structure, the business assets must be forfeited.

* Chapter 11 bankruptcy employs reorganization to manage a troubled or failing business. With Chapter 11, the business continues to run under the terms of the bankruptcy. The process reorganizes the hunting-industry retailer’s debts to allow smaller payments to creditors. Of course, the operation must have enough incoming cash to make those new payments.

* Chapter 13 is a reorganizing option available only to individuals, including sole proprietors. Chapter 13 works similarly to Chapter 11, with the continued operation of the business as it pays its creditors. Chapter 13 wipes out only the sole proprietor’s personal liability for business debts — not the business itself.

The Small Business Reorganization Act

In August 2019, the Small Business Reorganization Act enacted a new Subchapter V of Chapter 11 bankruptcies. Designed to make bankruptcy more accessible to small businesses, Subchapter V condenses the process and limits the costs normally associated with filing Chapter 11. Subchapter V is available to any person engaged in a commercial business activity (other than ownership of single asset real estate) with debt (both secured and non-secured) not exceeding $7,500,000.

The Subchapter V bankruptcy can only be filed by the debtor, as opposed to an “ordinary” Chapter 11, where creditors are permitted to file competing plans. What’s more, with Subchapter V, a hunting-industry retailer can file a bankruptcy plan that is subject to court approval — without the need for debtors to approve the plan.

Reaping Bankruptcy Benefits

No one wants or plans to file for bankruptcy, but it can offer the owners of struggling small businesses a chance to stay afloat. While not every business entity can file, or benefit from, each bankruptcy type, there are a number of general benefits, including:

* Extra time to reorganize. A temporary breather from debt payments and/or renegotiated contracts might be all that the hunting-industry retailer needs to turn itself around or survive the current economic crises.

* A competitive advantage. The ability to temporarily suspend the operation’s debt-service obligations, pay only a portion of some current debts and dismiss signed contracts can result in a more efficient operation than that of any competitors.

* Decreased personal risk. Simply shutting the doors of the business doesn’t stop its expenses. Mortgage, rent, insurance, property taxes, security and maintenance costs and other expenses called “carrying costs” will continue after closure. If the operation’s owner is personally liable for any or all of the business’s debts, he or she might lose their savings and/or home. Filing for bankruptcy will, at least under Chapter 7, formally end the business, stop bills from accruing and end many personal obligations.

* If a business continues to lose money, a bankruptcy can stop the outflow of cash for which an owner, partner or shareholder might be personally liable.

Caveats

Creditors do have rights, fortunately. For example, with the exception of bankruptcies filed under Subchapter V of Chapter 11 bankruptcies, creditors are entitled to share in any distribution from the bankruptcy estate, usually depending on the priority of their claim. Under the reformed bankruptcy laws, creditors also have the right to be heard in court regarding the payment plan and the liquidation of the debtor’s non-exempt assets and payments from the assets of the estate.

Even more importantly, a creditor has the right to challenge a debtor’s right to a discharge or to discharge the debt owed the creditor. In other words, creditors can voice their opinions about debts that might or might not be forgiven. They can also argue about assets that, perhaps, should have been included in the bankruptcy estate. 

Although the idea of wiping out business and/or personal debts can be tempting, declaring bankruptcy doesn’t wipe out all debts. In fact, it is not uncommon for the owners of many small businesses to pledge their personal assets, including the equity in their homes, as security for a business loan. Filing for bankruptcy may allow them to protect the home equity or other pledged personal assets from creditors — but not always.

Owners of limited liability companies and S corporations may also be liable for some debts. If, for instance, the owner of an LLC or corporation personally guaranteed a specific business debt, he or she may be liable for that debt. 

What’s more, in most bankruptcies, including Chapter 11 bankruptcy cases, the owners of LLC and S corporation entities are personally off the hook for the debts of their business only where there are no personal guarantees. In addition, bankruptcy will also make it more difficult to borrow in the future. And, don’t forget the expense. Filing fees, attorney costs and more can add up.

When the Shoe Is on the Other Foot

Beware! Even the best customers of a hunting-industry retail business can suddenly become deadbeats. How those slow- or no-pay customers are dealt with can determine whether the retailer will have the cash flow needed to sustain its operations. Indeed, the fate of every business depends on how customer credit is handled. 

As mentioned, the federal bankruptcy laws have long provided a safe harbor for troubled businesses to reorganize, refinance and begin the turnaround to profitability free from pressure by their creditors. Now, new bankruptcy laws severely reduce that safe harbor while at the same time making it more difficult for every hunting-industry retailer to deal with suppliers and customers that are in, or about to enter, bankruptcy.

When it comes to dealing with a customer or supplier after discovering they are bankrupt, the hunting-industry retailer should immediately cease any collection action. This automatic stay is designed to protect the debtor and his property from all forms of collection during the bankruptcy. Naturally, when a notice of the bankruptcy is received, proof of a claim should be promptly filed with the court. And, keep in mind that deadlines are strictly enforced in bankruptcy cases.

So-called “secured creditors” are at the top of the payback list and have specific rights to the property that is the collateral for their claim. Secured creditors also have the best chance of getting relief from the automatic stay or “adequate protection payments” to prevent a decline in the equity available to secure their claim.

All too often, when a bankruptcy notice is received, the assumption is made that there are neither rights nor alternatives when it comes to the claim of the hunting-industry retailer. Fortunately, creditors do have rights, even with bankruptcies filed under Subchapter V of Chapter 11.

If any business owner or manager is aware of a customer’s bankruptcy, even informally, it must act to preserve its rights. Most courts hold that a debtor with actual knowledge of the case, however obtained, will be bound by the deadlines for filing objections to debt discharges and for filing claims. 

The Bottom Line

No small business owner wants to fail, and regardless of the spin put on it, bankruptcy is a failure. However, despite its negative connotation, filing for bankruptcy may be the best course of action for any debt-ridden or troubled hunting-industry retailer — or its owner — to take. Bankruptcy can provide breathing room to reorganize and create a plan to move forward to profitability, or it can stop the bleeding that might lead to the seizure of the operation’s owner or shareholder’s personal assets. Obviously, regardless of which side of the troubled business you are on, professional help is both needed and recommended.