Business Ownership & Bankruptcies
When you own a business, you need to be acutely aware of all the risks that can come along with the rewards. One of the scariest and most serious risks is of you and your company being unable to pay off debts that you have incurred over the course of trying to form a successful enterprise. Bankruptcy is an option that can help you, though it does carry some serious risks to your property, your finances and your credit score.
Your bankruptcy options depend on what type of business you run. If you have sole proprietorship, your finances and your company's are the same for all legal and financial purposes, and your personal assets will be seized by creditors if you are unable to pay voluntarily. You are not more protected under a partnership, since your finances are tied in with those of your partner(s), and if they are out of funds or assets, the responsibility will fall to you.
A corporation or LLC will protect your personal finances only if you have refrained from signing away your liability rights or personal property. Your rights may be stripped from you if you ever signed an agreement of personal responsibility with a bank or other creditor, which is common if your business is starting out or has any credit issues. Filing for bankruptcy under those conditions will not save you from being hit by creditors. If you have kept all of your limited liability rights, however, your personal finances and assets will not be considered when filing for business bankruptcy.
Bankruptcy may be your only recourse to recovery, though it is a difficult choice to make and road to follow. Chapter 7 and Chapter 13 bankruptcy are your options to file if you have any personal accountability. Chapter 7 bankruptcy entails selling off your assets, and then wiping out any debts that are eligible for discharge. Chapter 13 offers you a three-to-five year payment plan that you pay off with your income instead of your property.
Filing will put an automatic stay on your debts, so that creditors are unable to foreclose your home, boats, or other property of yours. This may do nothing but give you time to try and scramble to repay or refinance so that you will be in less debt and more able to pay everything off. Chapter 13 harms your credit more, but it will let you keep your property if you are attached to it or need to keep it.
Chapter 11 bankruptcy is more geared towards corporations, and creditors and debtors must meet and discuss the terms of reorganization so that the debtors, meaning you and other business owners/shareholders, can retain their assets and continue to run the business under new terms set by the creditors. It can take years to agree upon a plan, however, so this may not be the best course of action if you are going to run up far more debt than you can ever hope to pay for.
Selling your business may be a better option than bankruptcy if you can find a buyer who believes they can save the business from extinction. Keeping your paperwork accurate the the letter and to the decimal place is absolutely key. Trying to hide assets from your creditors, including hastily selling them to family, will not save them and will knock down your credibility. Keep your personal accounts in a separate bank from your business funds whenever possible, since a bank that sees that you are becoming too much of a risk may extract funds from your checking account. Do not make “preferential payments,” a term describing paying only certain creditors, since the Bankruptcy Code will penalize you for it.
While the decision to file for bankruptcy is harrowing, it may be your only choice if you can no longer keep your business floating on top of its debts. Act cautiously and be as honest as possible about your situation once you have realized that you cannot see this through.
- Understanding Credit:
