Filing for Bankruptcy for Your Business

How to File for Small Business Bankruptcy

By: Pam Grundy

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Times are tough for small businesses and big businesses alike. Even the Big Three automakers in Detroit are struggling to survive. Many major retail and industrial concerns have already gone belly up. How can a small business person know when it is time to give up and cut his or her losses? How do you know when to file bankruptcy and how can you go about it?The most important thing to understand about filing business bankruptcy is that bankruptcy is not necessarily the end of the line. Bankruptcy was originally designed to give financially troubled people and businesses a fresh start and a second chance. Many famous people have declared personal or business bankruptcy and have gone on to become enormously successful. Abraham Lincoln filed bankruptcy. Today, no one remembers Lincoln for his bankruptcy, and chances are good that if you need to file, when all is said and done no one will remember about your bankruptcy either.

Bankruptcy does have a negative and fairly severe effect on your ability to get credit however, so it makes sense to make sure it is the best and/or only option before proceeding. Here are some facts about business bankruptcy you will want to know, and some considerations you will want to make about when and how to file:

Review Your Finances

Although this step may seem obvious, take a look at your debts, your assets, and your prospects with an eye to how you can simplify your situation. Can some expenses be pared? 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? A thorough review of your business practices and your books should come before anything else. Take you time and look over everything with fine toothed comb.

Review Your Bank Accounts

If after a thorough review you are pretty sure you are going to have to file for bankruptcy to discharge your debts, be aware 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 withheld that you did not actually pay the IRS, and you will remain liable for the back taxes plus the penalties, even after the bankruptcy is final.

Find and Hire a Good Attorney

You don’t have to use an attorney to file a business bankruptcy, but bankruptcy is complicated and business bankruptcy 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.

Once you decide to go forward, you will pay for further sessions at that time. While you may assume that an attorney will try to talk you into bankruptcy to make money, so many people are filing right now that this is hardly likely. You are under no obligation to take any attorney’s advice, but often a good attorney will see a way out that you cannot.

Understand Your 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.

Be Realistic

Bankruptcy carries a social stigma that is not entirely warranted, which causes many people to avoid it as long as humanly possible, even when it is clearly the best option. 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, and if it is consistent, take it.

Don’t get Sucked into Debt Consolidation Scams

Lots of organizations prey on people with financial problems. Don’t even consider agreeing to hand over payment arrangements to some third party ‘debt counseling’ agency until you speak with a bankruptcy attorney. Often these companies simply skim huge fees for themselves or are getting paid by the same banks and credit card companies you already owe, and you will only delay the inevitable and make it more complicated when you do file, if you agree to work with them.

Summary

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. You can benefit from lessons learned and go forward to succeed at something else.

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