You might not think it, but bankruptcy is a good thing. It might not feel like it at first, but if you look at it from a long-term perspective, you’ll see that it’s a good business decision. In the past, the process of getting a business through bankruptcy was a long and difficult one. In reality, you could go through bankruptcy without too much worry or fuss, so long as you had good assets and good assets.
Is bankruptcy the solution to your financial problems? Well, it might be, but it’s not an easy answer. There are a lot of steps you need to take to ensure that you manage your bankruptcy efficiently. This blog will highlight the right process for you to take to ensure that you navigate your bankruptcy as smoothly as possible.
This blog is not an advice platform. The content should not be relied upon to make or refrain from making any decisions. The content should not be used as a substitute for professional or financial advice. All information is provided “as is” and solely for informational purposes.
Some people worry that filing for bankruptcy will negatively affect their credit score. This, however, is a myth. According to credit-reporting business TransUnion, bankruptcy will never be listed on a credit report – only a bankruptcy might show up.
Next, there is a misconception that bankruptcy will make a person a financial pariah. This is also a misconception.
If you’re facing bankruptcy and want to know how to navigate bankruptcy efficiently, you’re not alone. Many small businesses and individuals end up filing for bankruptcy to get their lives back on track. Knowing that you’re not alone and that many others have filed for bankruptcy and survived can help you learn how to navigate bankruptcy efficiently.
This blog will share some tips and tricks for those looking to navigate bankruptcy efficiently.
1. What is bankruptcy?
2. How does bankruptcy affect my business?
3. When do I consider bankruptcy?
4. What are my bankruptcy options?
5. What is Chapter 13 bankruptcy?
6. What is Chapter 7 bankruptcy?
7. How to pick a bankruptcy lawyer?
8. What happens after I consult a bankruptcy lawyer?
9. Additional resources.
What is Bankruptcy?
Bankruptcy is a legal proceeding involving a person or business that is unable to repay its outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of the outstanding debt.
How does bankruptcy affect my business?
If your business is a sole proprietorship, the trustee may insist that you close it, at least until the trustee can assess the value, exempt status, and likely sales price of any business assets in your bankruptcy estate. This assessment usually lasts a couple of months or more. Closing the business also prevents you from incurring any additional liabilities during your bankruptcy case, whether for regular business debts you might take on during the bankruptcy or for potential legal claims against your business (for example, if someone gets hurt on your premises).
Businesses that operate without assets, such as service providers, consultants, or freelancers, might be allowed to remain open during bankruptcy, especially if your chances of running up debt or incurring legal liabilities are small. But even a small service business might be shut down if it has significant accounts receivable that the trustee could collect. For example, if you own a real estate business and have commissions in the pipeline that haven’t been paid yet, the commissions will become part of your bankruptcy estate when they are paid. Any proceeds generated by the business while you’re in bankruptcy are also part of your bankruptcy estate.
Partnerships and Multimember LLCs
If your business is a partnership or multimember LLC (it has more than one owner), your share of the business will be part of your bankruptcy estate. Unless you are a majority owner, however, most states prohibit the trustee from interfering with the partnership or LLC or taking its assets.
Here’s how it works. A creditor or bankruptcy trustee can obtain a “charging order” against the debtor-owner’s interest in the business. Essentially, a charging order acts as a lien against the business interest, allowing the creditor or trustee to receive the profits that would otherwise be paid to the owner of the interest. However, a charging order won’t do a creditor or trustee much good if a partnership or LLC doesn’t regularly distribute profits to its members. The trustee takes over only the economic right to receive income from the partnership or LLC; typically, a person assigned economic rights are not allowed to manage or vote in the partnership or LLC nor to assume other membership rights granted to full owners under the partnership or LLC operating agreement. The trustee can assign or sell the economic rights in your own interest to someone else but generally cannot transfer or sell your share of the partnership or LLC.
You may need to get out of a partnership or LLC before filing for bankruptcy. If you are a partner in a partnership or a member of an LLC, you may have signed a buy-sell agreement that requires you to terminate your ownership interest before filing for bankruptcy. If you violate a provision like this, you could be facing a lawsuit from your co-owners. A small business attorney can help you assess your obligations and options here.
Corporations and Single-Member LLCs
Your bankruptcy estate includes your corporate shares or LLC membership. If you are the sole or majority owner of the corporation or LLC, the bankruptcy trustee can take over your shares or membership interest and vote to sell or liquidate the business, then distribute the proceeds to the business’s creditors.
In deciding whether to dissolve a single-owner corporation or LLC, the trustee will take a cost/benefit approach. The trustee will look at the cost of dissolving and liquidating the business, how much the assets can be sold for, and whether any of the assets are exempt. In many cases, the business owes almost as much as (or more than) it owns, so liquidating the business wouldn’t make financial sense. But if the business has a moderate amount of debt and valuable, non-exempt assets, the trustee is likely to dissolve the corporation or LLC and sell the assets.
If you own a viable corporation with other members, then your personal bankruptcy may or may not affect your business. For example, if you own a corporation equally with two or three other shareholders, you may be able to file for personal bankruptcy without any consequences to the corporation. Although the trustee has the right to vote shares in a corporation, he or she generally won’t be able to call a meeting and force a dissolution of the corporation to get at its assets unless you are the majority shareholder. Your stock is still part of your bankruptcy estate, but it won’t have much value to the bankruptcy trustee unless one of the other owners wants to buy it.
When do I consider bankruptcy?
What are my bankruptcy options?
The thinking behind this is that the bankruptcy code was set up to give people a second chance, not to punish them forever. If some combination of bad luck and bad choices has devastated you financially, and you don’t see that changing in the next five years, bankruptcy is your way out.
Even if you don’t qualify for bankruptcy, there is still hope for debt relief. Possible alternatives include a debt management program, a debt consolidation loan, or debt settlement. Each one of those choices typically requires 3-5 years to resolve, and none of them guarantees all your debts will be settled when you finish.
Remember that bankruptcy carries significant long-term penalties. It is stuck on your credit report for 7-10 years, which can make getting loans in the future very difficult.
The flip side of that is there is a great mental and emotional lift when all your debts are eliminated, and you’re given a fresh start.
What is Chapter 13 bankruptcy?
This chapter of the Bankruptcy Code provides for the adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep the property and pay debts over time, usually three to five years.
What is Chapter 7 bankruptcy?
This chapter of the Bankruptcy Code provides for “liquidation” – the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.
How to pick a bankruptcy lawyer?
Contact a few attorneys who seem qualified and arrange a consultation with each one. Some attorneys offer free meetings, and others will charge a fee of around $35 for this initial conference. Don’t assume no charge means lesser qualifications; starting with free meetings can help you get comfortable interviewing lawyers and may lead you to the one you choose.
At all of the meetings, aim to find out three things:
- Does the attorney have the expertise to help you?
- Are the fees are appropriate?
- Would you feel comfortable working with this person?
What happens after I consult a bankruptcy lawyer?
A good bankruptcy attorney will not try to “steer” you in the direction of bankruptcy, and the meeting may very well end with your attorney recommending that you hold off filing or that you completely forego the bankruptcy process altogether. Any good consultation will focus on your assets and how best to protect them as well the dischargeability of your debts.
Every Law Office Will Have a Different Process
The process is not uniform. Some offices will provide a questionnaire and list of required paperwork before the consultation; others will hand it out when you arrive. In either event, be prepared for some document collection as consumer bankruptcy post-BACPA has become quite detailed in its production requirements.
I want to begin by emphasizing that the below script is not comprehensive has not been taken from a transcript of an actual bankruptcy consultation but rather represents a generalized account of a dialogue that would commonly be seen at the initial meeting between lawyer and client. Find Lawyers HERE.
Conclusion: Bankruptcy is not always the end. It can be a way to start over more wisely.