Small businesses provide employment opportunities and contribute to the community’s growth, making them the backbone of the economy. However, running one is never easy and, sometimes, it even comes to the point that it faces financial difficulties that can lead to bankruptcy.
Bankruptcy is a legal process that allows businesses to restructure their debts and sometimes discharge them. Filing for one is a double-edged sword: it can cause long-term consequences such as impacting your credit score, but it’s also a chance to start over and learn from past mistakes.
If your small business has taken a hit and you believe you may be on the edge of bankruptcy, you will need guidance to navigate this decision. This article will discuss how to deal with this financial struggle, from understanding the different types of bankruptcy and working with experienced lawyers to developing a plan for moving forward.
Understand the Different Types of Bankruptcy
There are two primary types of personal bankruptcy that most small business owners and individuals can file; Chapter 7 and Chapter 13. These chapters are different not only in nature but also in requirements. That’s why it’s important to understand them first to determine which one is the best for your business.
Also known as liquidation, filing for a Chapter 7 bankruptcy indicates that your business is past the stage of reorganization and you must sell off assets, supervised by a court-appointed trustee, to pay your creditors. The remaining debt, if there is any, is generally forgiven when all assets are sold.
- Must be a corporation, a small business, or an individual
- Have not filed for a Chapter 7 bankruptcy for eight years or Chapter 13 bankruptcy for six years
- Finished an individual or group credit counseling course
This form of bankruptcy, also known as the wage earner’s plan, is when you develop a plan to repay all or part of your business debts. Here, you will present a repayment plan to make installments to creditors over a proposed timeline (usually either three or five years).
- Have a stable income
- Have not filed for a Chapter 13 bankruptcy for two years or Chapter 7 for four years
- Proof of filing federal and state income tax returns for the past four years
- Finished an individual or group credit counseling course
- Combined total secured and unsecured debts are less than $2,750,000
Hire an Experienced Bankruptcy Lawyer
Bankruptcy is a complex and taxing process that can get confusing, especially if you’re not knowledgeable of the laws and regulations concerning it. Hiring a bankruptcy lawyer can help you better navigate this procedure.
Not only will you have someone explaining to you the technicalities of the process, but it can also alleviate the anxiety and stress of the task. Having an experienced bankruptcy lawyer by your side also ensures that you’re on the right track and ensures that your filing gets through successfully.
Evaluate Your Financial Situation
Going over your financial situation with your lawyer enables you to get a clear picture of your income, expenses, debts, and assets, and your ability to pay off your debts. It will also help you determine which type of bankruptcy to file for or if there are other options available to you that may be less severe.
Moreover, evaluating your financial situation supports you in understanding the potential consequences of filing for bankruptcy. This includes how it will affect your credit score, your ability to obtain loans or credit in the future, and the impact on your employees and customers.
Gather All Necessary Documents
Gathering all necessary documents for your bankruptcy filing will help it run smoothly and ensure that your petition is accurate, complete, and complies with all legal requirements. Otherwise, your case may be delayed or even denied, which can have serious consequences for your business.
Make sure that your documents are stored in a secure place such as a code-locked safe. If you have digital files, you must have a solid cybersecurity system in place. This is to ensure that sensitive files such as tax returns, bank statements, and financial statements are safe from cybercriminals.
Develop a Plan
Having a plan is essential for any business-related proceedings, including a bankruptcy filing. It will help you maximize the benefits of bankruptcy while also minimizing its negative effects on your enterprise. A plan will also prevent you from losing control of your business and its assets and ensure that you will achieve your desired outcomes.
Your plan should include prioritizing your goals, developing a strategy, how you will notify and negotiate with creditors, and ways to manage your business during the bankruptcy process.
It must also have a rehabilitation strategy if you’re filing for a Chapter 13 bankruptcy or an approach on how to liquidate your assets if you’re petitioning for a Chapter 7 bankruptcy.
Attend Bankruptcy Hearings
The bankruptcy process will legally require you to attend several court hearings, including the initial meeting of creditors and the confirmation hearing. Attending these proceedings allows you to demonstrate your commitment to resolving your debt and shows that you’re taking the process seriously.
Being present during your hearings also enables you to stay informed about the status of your bankruptcy case and any developments that may affect your business. However, you will need to manage your schedules between attending the bankruptcy proceedings and running your company.
Using a time-tracking app can help you efficiently manage your time and effectively prioritize your tasks during the bankruptcy process.
Bankruptcy is a daunting process that can have long-lasting effects on your small business. It may even seem like it’s the end of your enterprise. However, there is another perspective on this process; it can be an opportunity to start fresh and learn from past mistakes. By taking the steps outlined above, you can increase your chances of achieving your desired outcomes and setting your business on the path to financial recovery.