Business Finances: Is Bankruptcy the Answer?
BY: LUCINDA WATROUS ON WEDNESDAY, JULY 12, 2017
When you first start a business, it's common to run into financial issues. Startup capital isn't always easy to come by – even with investors, grants, and small business loans. Whether you've been in business one month or 25 years, financial matters can get tough. If you find your business continually struggling, no matter what marketing efforts you're making, it may be time to explore options for handling the debt.
Chapter 11: Business Reorganization
Chapter 11 bankruptcy is an ideal choice in situations where debt is overwhelming, but not so much so that the business can't continue to operate. Under this type of bankruptcy, the debt is reorganized with the assistance of a court-appointed trustee. In some cases, the business owner can be this trustee.
The company files a reorganization plan that outlines how creditors will be dealt with. Then, creditors vote on the plan. If the court finds the plan to be equitable and fair, it is approved. These plans allow payments to be made to creditors for an extended period of time – in some cases more than 20 years.
This form of bankruptcy is complex, and not all plans are successful. If you plan to take this route, expect it to take at least a year, if not longer, to get the plan confirmed.
Chapter 7: Business Bankruptcy
Filing chapter 7 bankruptcy could be the best choice when you are certain the business has no future. This is typically used when the business debts are so overwhelming them that restructuring them is not feasible. This is also the best option when the business doesn't have substantial assets. If the business is an extension of an owner's skills, it typically doesn't pay to reorganize the debt.
Using this form of bankruptcy means the business is done and will not continue any kind of operation in the future.
With this type of bankruptcy, the bankruptcy court appoints a trustee to take possession of business assets to distribute them amongst creditors. Once the assets are distributed and the trustee is paid, the sole proprietor gets a discharge.
A discharge means the business owner is released of obligations for the debts. If your business runs as a partnership or a corporation, however, it will not receive a discharge.
Chapter 13: Personal Bankruptcy
This is an option for businesses that operate as sole proprietorships. As a sole proprietor, your business is a legal extension of you as the owner, meaning you are responsible for all assets and liabilities.
Under this form of bankruptcy, you file a repayment plan with the court that explains how you are going to repay your debts. The amount you'll repay depends on how much money you earn, the amount of debt you owe, and the amount of property you own.
If your personal assets are intertwined with your business assets because you operate a sole proprietorship, you can avoid loosing your house if you file under chapter 13 rather than chapter 7.
Alternatives to Bankruptcy
There are some situations where bankruptcy doesn't make sense. It's important to remember it's not a free pass to just get out of paying your debts. If you believe you can dig yourself out of the financial disaster you're in within five to seven years, then it is better to use other options. After all, bankruptcy tarnishes your credit rating for seven years, making it virtually impossible to secure financing for a car or a home – and if you manage it, it will be at a higher interest rate or require a substantial down payment.
·Negotiating with creditors outside of court: It may be possible to get better interest rates or lower payments from creditors through refinancing outside of court. Court is time consuming and costly, so many creditors are open to working with clients directly to come to a solution that allows business owners to keep themselves afloat while still meeting their debt obligations.
·Assignment for the Benefit of Creditors (ABC): This alternative to chapter 7 bankruptcy that allows businesses to sell their assets themselves. Though the state will have some oversight throughout the process, it generally provides benefits to both the business owners and their creditors. The people managing a business understand its assets and the market for said assets better than a trustee, allowing them to get a better sales price. And ABCs cost less time and money than bankruptcy, so many creditors consider it a favorable solution.
·Selling the Business: If your business is worth more than the sum of its assets, it is possible to sell the entire thing, rather than dealing with individual assets. However, it can be a difficult undertaking since you're trying to sell the business while also showing that you cannot pay creditors. There are investors who will purchase struggling businesses and turn them around, if they believe it can be done. around, if they believe it can be done.
·Debt Consolidation Loans: This option is helpful for sole proprietorships that are saddled with a lot of high interest credit card debt. These loans consolidate all debts into a single lump sum payment for a period of three to five years. Generally speaking, even though they too are interest bearing loans, the interest rate is lower than with credit cards, and the payment can often be less than making just the minimum payments on the credit cards. This way your credit card accounts are paid in full, boosting your credit score, and you don't get caught in the minimum payment cycle that could leave you taking a decade or more to pay off the debt. high interest credit card debt. These loans consolidate all debts into a single lump sum payment for a period of three to five years. Generally speaking, even though they too are interest bearing loans, the interest rate is lower than with credit cards, and the payment can often be less than making just the minimum payments on the credit cards. This way your credit card accounts are paid in full, boosting your credit score, and you don't get caught in the minimum payment cycle that could leave you taking a decade or more to pay off the debt.
Money Management Matters
Even if you're managing every penny that goes out compared to what comes in, there are some situations that can't be avoided. If you suddenly have clients leave your business, or clients that are routinely late paying their invoices, it's easy to see how your own business could end up having to turn to bankruptcy. But before you decide to take that plunge, speak with a qualified business bankruptcy attorney. They can advise you on what's best for your individual case.
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