Though it was not wholly unexpected given the extensive campaign rhetoric, the Trump Administration’s decision to end the DACA (“Deferred Action for Childhood Arrivals”) program on March 2018 is nevertheless sending shockwaves throughout the business community — especially among small businesses that rely on “dreamers” to fill out their workforce, or comprise a significant portion of their customer base. And so, this policy change begs the unsettling question: does the imminent end of DACA mean we’ll see a spike in small business bankruptcy filings?

Like many important business questions that involve prognostication (read: a crystal ball or tea leaves), the answer is an honest but rather unsatisfying: maybe. Yes, it’s possible that businesses that cannot affordably replace lost workers or customers will have no other option but to file for bankruptcy. But then again, it’s also possible that Congress may — as the President has suggested — be able to put together a workable plan that provides a path to citizenship for dreamers, and as such would allow them to legally remain and work in the U.S.

Well, since I don’t have a reliable crystal ball and my set of fortune-telling tea leaves is currently in the shop, I thought it would be more practical, pragmatic and far simpler (not to mention safer!) to steer well clear of the political discussion, and explore the basics of filing for bankruptcy — just in case we do see a rise in filing next year.

According to the Law Office of Charles Huber, which has more than three decades of experience in business and consumer bankruptcy, there are three types of bankruptcy filings: chapter 7, chapter 11 and chapter 13.

  • Businesses that file for chapter 7 bankruptcy immediately shut down and cease operations. There is no discharge at the end of the process. A court-appointed Bankruptcy Trustee takes an inventory of all non-exempt assets, and liquidates them to pay creditors. While filing for chapter 7 bankruptcy is a major step, one of the key advantages is that it prevents creditors from “piercing the corporate veil” and accusing a business owner for failing to meet their legal obligations. Everything is handled by the Bankruptcy Trustee.
  • Businesses that file for chapter 11 bankruptcy become a debtor-in-possession. Basically, this means that their business remains operational, and the owner functions as a Bankruptcy Trustee (i.e. liquidating assets as agreed in order to pay creditors). Chapter 11 bankruptcy is very complex, and disgruntled creditors can petition to court to replace business owners who they allege are not functioning in the best interest of the estate.
  • Businesses that file for chapter 13 bankruptcy can cover existing debts with future income, which means there is no need to inventorized and liquidate assets. To qualify for a chapter 13 filing, businesses must not have more than $383,174 in unsecured debts or $1,149,525 in secured debts. What’s more, the court must approve the repayment plan and verify that it’s realistic.

There are advantages and drawbacks of each filing option, and not all options will be open to every type of business (for example, businesses that are incorporated or structured as partnerships cannot file for chapter 13 bankruptcy). The smartest and safest thing to do is consult with a bankruptcy attorney who knows what the landscape looks like — and especially where the pitfalls and traps are. Because if you thought that politicians had bad tempers, they are fluffy, playful kittens compared to angry bankruptcy court judges!