Business bankruptcies are no less emotionally and psychologically taxing than personal ones. Many would see this as evidence that their company has failed. It’s best to take your time while making an emotional decision so you don’t miss anything or make a mistake that makes things more complicated.
In this article, we’ll go over some of the things you need to know before your company decides to file for bankruptcy. To help you better manage the bankruptcy process, we will also go through the actions required to file a bankruptcy for your business, as well as frequent pitfalls that businesses make when filing for bankruptcy.
The first step is to figure out which form of bankruptcy is appropriate for your company
What you need to know before filing for bankruptcy
In most cases, a company has a choice between three distinct forms of bankruptcy. These are:
Chapter 7 Bankruptcy
Chapter 11 Bankruptcy
Chapter 13 Bankruptcy
If you want to shut down your company, you need apply for Chapter 7 bankruptcy. In this process, the company’s assets are sold off to satisfy as much of the debt as feasible owing to the company’s creditors.
If you wish to rebuild your company and keep operating, Chapter 11 bankruptcy is the right choice for you. It entails reorganizing your debts so that you can pay them and getting rid of the ones you can’t. In contrast to a Chapter 7 liquidation, your business would continue to function as the restructured entity.
Reorganizing a sole proprietorship is possible in Chapter 13 bankruptcy. Chapter 13 bankruptcies are often used by individuals to discharge consumer debt, although a sole proprietor can file for Chapter 13 under specific conditions. Chapter 13 bankruptcy allows you to reorganize your debt into manageable monthly payments and minimize your overall debt load.
However, there are some debts that must be paid in bankruptcy and cannot be dismissed. Before filing for bankruptcy, you should find out if your debt will be discharged or if you will still be responsible for making payments from future revenue. You should consult a bankruptcy attorney if you have questions about whether certain debts will be discharged in Chapter 7, Chapter 11, or Chapter 13 bankruptcy.
How Do I File for Business Bankruptcy?
Depending on the form of bankruptcy that best fits your company’s needs, several procedures may need to be followed. Hiring an attorney to assist you in determining what paperwork must be filed is a good idea. This being said, the fundamental procedures for a company filing for bankruptcy are as follows:
- After reviewing and signing a bankruptcy petition prepared and filed by your attorney with the bankruptcy court, your business will be protected from creditor action during the bankruptcy process by an automatic stay.
- Your lawyer will help you submit the paperwork establishing your company’s assets, obligations, etc.
- A business restructuring plan was created and filed by your attorney.
- Both your creditors and the court will have to approve any restructuring or repayment plan you propose.
- As soon as the court approves your plan, you can start making payments to your creditors. The court may forgive some of your debt.
- If you are personally liable for business debt, filing for bankruptcy may be essential.
Begin gathering the necessary business records if you’re considering bankruptcy for your company but aren’t sure if it’s the appropriate move. The following are examples of needed documentation:
- Bank statements
- Information pertaining to individual and corporate tax returns
- Documentation of financial performance over the past two or more years
- A detailed accounting of the company’s tangible & intangible assets
- Accounts receivable and payable statements and/or a list oef business debts
- Any and all documentation detailing your company’s financial obligations, sources of revenue, and overall worth
Common Errors Companies Commit When Filing for Bankruptcy
There are several errors that could make the procedure more difficult than it needs to be. These include….
- Use of company credit cards after bankruptcy filing is a clear violation of the bankruptcy code. This may lead to the inability to write off any expenses related to the transaction
- Not showing up for court proceedings. You may find it more challenging to file for bankruptcy if you ignore a creditor lawsuit. You might be able to avoid major problems by declaring bankruptcy
- Prioritizing debts owed to relatives over those owed to outside parties. As a result, the family member may have to return the money
- Taking out a new loan or getting a second mortgage to pay off existing debt. For starters, this only leads to a never-ending spiral of debt, and at worst, it’s a quick way to give up a valuable asset you otherwise may have held on to
- Taking money out of your retirement fund. If you are filing for bankruptcy, you can usually keep most of the money in your retirement accounts and should not liquidate them
- Selling or giving an asset to a new owner, such as a company or family member. If this was done within two or (in rare cases) four years of your bankruptcy filing, you may be able to get it erased
- Keeping information from your attorney. Your bankruptcy attorney will guide you through this procedure. But you must be honest. Your attorney may not have warned you about the serious repercussions of not disclosing information
Should I Get a Bankruptcy Lawyer?
A bankruptcy lawyer can provide advice tailored to the situation and help clients understand the serious repercussions of not disclosing information.
Key Takeaways – Businesses considering bankruptcy should do their research and avoid common mistakes before taking this drastic step. There are a few different types of bankruptcy, including Chapter 7, Chapter 11, and Chapter 13.If you file for bankruptcy, you may not be able to avoid paying certain bills. If a business owner is considering filing for bankruptcy, he or she should speak with a bankruptcy professional to determine which debts will be erased and which would require payment out of any remaining earnings. Using company credit cards after filing for bankruptcy is a blatant violation of the bankruptcy code and might make the process more problematic.