By Emma Cochran, CPA, Manager at Blue & Co.
Bankruptcy – it’s something no business owner or individual wants to think about. However, with market declines, volatile tariffs, and other economic pressures, it is an unfortunate reality that some businesses are facing.
In the alcoholic beverage industry, there have been several high-profile bankruptcies in the past 18 months. These bankruptcies come at a time of major change in the industry. According to a 2025 Gallup poll, only 54 percent of Americans say they consume alcohol.
Decrease in consumer consumption is not the only hardship that the alcohol industry is facing. Reciprocal tariffs imposed by many countries, especially Canada, halted exports to some of the largest international markets. Unfortunately for some alcohol brands and distilleries, these hurdles were too large to overcome, and bankruptcy became the only option.
While no business owner wants to consider filing for bankruptcy, it is important to be aware of the tax implications of bankruptcy in the “what if” scenario.
There are three common types of bankruptcy that many distillers will hear about: Chapter 7, Chapter 11, and Subchapter V.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation case and is usually used as a last resort when reorganization or sale is not realistic. When Chapter 7 bankruptcy is declared, a trustee is immediately appointed and takes control of all assets. Usually, all business operations cease unless the trustee operates the business for a short period of time.
All company assets are sold, and proceeds are distributed in order of priority. In most cases, equity owners do not receive any proceeds because creditors’ claims take priority.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is typically viewed as a reorganization process rather than true bankruptcy. In a Chapter 11 filing, business continues to operate under the current management. An automatic stay is put into effect, stopping most creditor collections.
During Chapter 11, the debtor must get lenders’ permission or court approval to use cash generated while working toward a plan that addresses debt and future operations.
There are three main outcomes of Chapter 11 bankruptcy:
- Successful reorganization,
- Sale of assets, or
- Conversion to Chapter 7
Many business owners see the appeal of Chapter 11 for the ability to restructure and reorganize the business, compared with liquidating under Chapter 7.
Subchapter V
Similar to Chapter 11, Subchapter V focuses on reorganization rather than liquidation. Subchapter V is a streamlined Chapter 11 for small businesses with less than $3.4M of debt. It is designed to move more efficiently and cost less than Chapter 11.
Eligibility depends on several requirements, including debt limits. These requirements will be confirmed at the time of filing under Subchapter V.
While many think of bankruptcy simply as a legal event, there are many financial and tax implications to consider.
Under federal income tax law, discharge of debt is typically included in a taxpayer’s adjusted gross income. Types of debt that would be included in income include forgiveness of credit card debt, business loans, or other similar debt. The taxpayer receives a Form 1099-C from the lender and reports the amount on their tax return.
There are important exceptions to this rule. According to the Internal Revenue Code, discharge of debt under a Chapter 11 bankruptcy case is excluded from income. Also, if a taxpayer is insolvent, the discharge of debt is excluded from income. These exclusions may involve additional tax consequences and reporting. Most states follow federal treatment, but please check with your tax advisor to better understand the potential state income tax implications.
Although bankruptcy is something many business owners never want to face, it’s important to be informed about various options and potential tax implications. Contact your Blue & Co. advisor and legal counsel for more information and to discuss how bankruptcy or restructuring may affect you and your business.
