Times are tough all over and more businesses are filing bankruptcy. If you are considering this, there are several things you need to know about before proceeding.
It can be difficult to know when filing bankruptcy for your business is the best step to take.
If you are considering this action, it is important to fully understand the process, ramifications and results of filing bankruptcy for your business.
It Doesn’t Have to be the End of the Line
The most important thing to understand about filing business bankruptcy for your small business is that it is not necessarily the end of the line.
It will eliminate many of your debts, but it does not have to close your business.
Bankruptcy was originally designed to give financially troubled people and businesses a fresh start and a second chance.
However, bankruptcy does have a negative and fairly severe effect on your ability to get credit, so it makes sense to make sure it is the best and/or only option before proceeding.
Start With a Review of Your Finances
A thorough review of your business practices and your books should come before anything else. Take your time and look over everything with fine toothed comb.
• Can some expenses be reduced or eliminated?
• Will any of your creditors give you a temporary reprieve on loan payments?
• Can you change the way you deal with your customers to increase cash flow?
Review Your Bank Accounts
If after a thorough review of your situation, filing bankruptcy for your small business is the best step, you should know that any accounts you have open at banks where you owe money will be seized the minute you file.
Try to close out those accounts and move them to another financial institution beforehand if you can.
Sometimes a bank will not allow you to do this, depending on how much you owe the bank and how your debt is structured, but take a look and try to make adjustments if you can.
Don’t Try to Hide Your Assets
If you file for bankruptcy and you have tried to put your assets in the name of your spouse or a relative, you can be charged with fraud once your case is reviewed in bankruptcy court.
It isn’t that hard to find assets when people move them around this way, and it will only make it all worse for you in the long run, so don’t attempt to conceal what you own.
Pay Your Payroll Taxes
Filing for bankruptcy won’t discharge payroll tax debt, so you will only complicate your situation if you don’t stay current.
If you can’t pay anything else, find a way to pay your taxes.
The IRS will assess hefty penalties for any payroll taxes that aren’t paid.
Find and Hire a Good Business Bankruptcy Attorney
You don’t have to use an attorney to file a business bankruptcy, but you should strongly consider a bankruptcy attorney.
This is a complicated process to begin with, but filing bankruptcy for your small business is even more complicated than personal bankruptcy.
If you try to file for bankruptcy without an attorney, you could make a mistake that could end up costing you even more than the attorney fees you were trying to save.
Most bankruptcy attorneys will meet with you at no charge to review your situation and make a recommendation.
Understand Your Bankruptcy Options
Business bankruptcy comes in four forms: Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
• Chapter 7 is for businesses that have no viable financial future. Assets are liquidated and whatever debt remains is discharged completely.
• Chapter 11 is designed for businesses that could survive with some basic restructuring. If you are swimming in debt but still have a viable future as a business once you get past that, Chapter 11 may be a better way to go. Under Chapter 11 you will most likely make partial payments on many of your debts and your business will stay intact, though in a different form.
• Chapter 13 is actually a personal form of bankruptcy that can include business debts.
• Chapter 12 is a form of Chapter 13 specifically designed for family farms and agricultural businesses.
Bankruptcy carries a social stigma, which causes many people to avoid it as long as humanly possible, even when it is clearly the best option. However, in many cases, delaying the inevitable ends up making the situation much worse.
Often a third party (like an attorney or a good accountant) will be able to see your situation more clearly than you can, so seek as much good advice as you can.
Don’t Get Sucked into Debt Consolidation Scams
Unfortunately, a lot of organizations prey on people with financial problems. They sound like the solution to all your problems, but the result is that your situation ends up being much worse.
Don’t agree to hand over payment arrangements to some third party ‘debt consolidation’ agency until you speak with a bankruptcy attorney.
There are quality organizations out there that can help, but there are just as many scams. Contact an attorney or your credit card company to get a recommendation.
Nobody feels good about having to file for bankruptcy. But when filing for bankruptcy is the right thing to do and is done correctly, it can provide the fresh start a responsible business person needs and deserves.
With your debts discharged (Chapter 7) or your business reorganized (Chapter 11) you can go forward and make new plans for your future. You can benefit from lessons learned and go forward to succeed at something else.