The advice of the accountants and bankers just didn’t work. Despite small business efforts, the financial crisis has finally gotten the better of the business. Every day brings deeper debt with no end in sight. It is time to consider the decision no business owner ever wants to think about – bankruptcy. Bankruptcy is the 800 pound gorilla in the room that no one ever wants to talk about. But not talking about the situation will not make it go away or even make it any easier to cope with. The law of bankruptcy is quite opposite to Family Law Advice and it has special applications.
As a business owner bankruptcy is not something to work towards. But having a basic understanding of the process can help with the decision making. Closing a business is a heart-wrenching decision that has rippling effects that extend out to many other people and businesses. But bankruptcy can sometimes be the best decision – one that will actually keep the doors open. Federal bankruptcy laws were designed to protect both the debtor and the creditors. While still painful, bankruptcy is a better option than jail. It is also better if it is initiated by the business owner rather than by the creditors.
Forms of Business Bankruptcy
- Chapter 7 is a total liquidation of company assets resulting in dissolution of the company.
- Chapter 11 (for corporations) and Chapter 13 (for sole-proprietors) is a reorganization of the company. A re-structuring of the company’s debts allows the company to continue operating.
Find a Bankruptcy Attorney
If there is no way out of credit problems, the first step is to meet with a good attorney. Get a recommendation from an accountant. A preliminary consultation should not cost anything and will allow time to ask some basic questions. Make sure there is trust and confidence in the attorney selected. The attorney will help determine if bankruptcy is really necessary and if so what type of filing is best based on the circumstances.
At all costs avoid any scheme that sells the idea of saving money by filing bankruptcy without an attorney. The legal process is complicated, filled with specific deadlines and forms. Mistakes will cost money and can create problems for years to come. This is definitely a process to leave to the professionals.
Filing for Bankruptcy
The first step is to provide the bankruptcy attorney with complete information about the company’s financial situation – income, expenses, assets, debts, leases, contracts etc. Try to include every minor detail possible. Do not attempt to omit or hide anything.
The attorney will file the appropriate forms with the bankruptcy court. The filing will provide an almost immediate “stay” against creditors. The “stay” will prevent creditors from taking any further actions to collect their debts.
Notifying Creditors and Making Payments
The bankruptcy court will notify all creditors of the bankruptcy filing and arrange for a meeting of creditors. This meeting usually takes place about a month after filing. The court will determine who gets paid and how much they will be paid. The decisions will be made based on a priority system.
The priorities system ranks creditors. Wages owed to employees and taxes are usually given the highest priority. Other high priority claims include secured creditors (those with a lien on the debtor’s property), administrative claims (creditors such as attorneys or accountants who have worked on the bankruptcy proceeding), and judgment creditors (creditors who have sued and received a judgment prior to bankruptcy proceedings).
Under Chapter 7 (liquidation) a trustee will be assigned and will make all decisions on the sales of assets and re-payment of debts. With Chapter 11 or 13, the court will requiret a plan of re-payment. The plan has to be approved by the court and must show that it is more beneficial for the creditors to agree to the reorganization than liquidation.
While bankruptcy is not a solution business owners like to think about, more like the option of last resort, it is the right course of action in certain circumstances. It is critical to talk openly and honestly with the business advisors, accountant and lawyer, to determine if filing bankruptcy would allow the business to survive the current financial downturn.