Does a Small Business Need to be Currently Engaged in Business to Qualify for a Small Business Bankruptcy?

Robert N. Loughran - Associate
Mar 17 2021

The purpose of a small business bankruptcy is to allow a small business to reorganize its business and debts in a timely, cost-effective manner, and hopefully allow them to remain in business for the benefit of the small business owners, employees, suppliers, customers, and others who rely on that business. 


In a recent case out of Fort Worth, the court was faced with the question of whether an individual who previously owned a now-defunct business and who has mostly business-related debts was eligible for a small business bankruptcy? See In re Johnson, 19-42063 (Bankr. N.D. Tex. 2021). The issue lies in the wording of the Bankruptcy Code, and its lack of temporal scope of the words “engaged in.” A debtor argued that prior ownership and management qualifies as a person engaged in a commercial or business activity; whereas the creditors argued that the debtor must actively be carrying out business at the time of filing to be engaged in business.

 

The court found that the words engaged in are inherently contemporary and not retrospective in focus. Therefore, since the business had ceased all commercial and business operations prior to filing and every indication was that the cessation was permanent, there was no business to try to keep operating. For those reasons, the court held that the Debtor did not qualify for a small business bankruptcy.

 

Other courts have been faced with this issue and have ruled differently, but this is the most thorough analysis of the issue from a North Texas court to-date.