8 Steps to Take Before You File for Business Bankruptcy

Many businesses face financial struggles. Whether you’re in a lean sales season or your company hasn’t caught up with a shifting market, you might wonder if business bankruptcy can help. Before you file for Chapter 11 bankruptcy or any other type of bankruptcy for business, it’s essential to consider all relevant factors and have a long-term plan for recovering.

1. Determine Whether Bankruptcy Is the Right Decision

Start by critically examining whether bankruptcy is the right decision for your company. Bankruptcy can help you reorganize debts and create a better financial outlook for the future, but it also harms credit. It can result in some loss of control as a trustee handles certain financial matters for you.

Any bankruptcy petition you file and the resulting court proceedings are part of the Bankruptcy Court public record. This can create uncertainty around your brand and for your customers and employees.

When considering business bankruptcy, you must weigh all potential pros and cons and decide if the outcome for your business is likely to be more positive than negative.

2. Choose the Right Bankruptcy Option

Understanding federal and local bankruptcy rules can help you choose a bankruptcy option that suits your situation. Typically, the best way to gain that understanding and make an educated decision is to speak with a business bankruptcy lawyer about your case. They can help you choose between options, which include Chapter 7, Chapter 11, Chapter 12, and Chapter 13 bankruptcy.

  • Chapter 7 is a liquidation bankruptcy
  • Chapter 11 is a reorganization process
  • Chapter 12 is a bankruptcy process for fishermen and farmers
  • Chapter 13 is a repayment plan

3. Identify Assets You Might Be Able to Protect

Bankruptcy can be the closing door on a business—a Chapter 7 liquidation proceeding typically involves liquidating assets to pay creditors as the company closes, for example. However, bankruptcy might let you restructure your financials to promote recovery from a financial crisis and a better chance of success in the future.

If your goal is the latter, you should identify assets you want to protect. A bankruptcy attorney can help you understand what equipment, property, and other assets you can protect through bankruptcy so your business can still use them.

4. Determine Which Debts Can Be Included in Your Business Bankruptcy

Before filing a bankruptcy petition, determine what debts can be included and how. Types of debts are treated differently:

  • Secured debts typically must be paid, even in a liquidation bankruptcy. Assets may be sold to pay these debts in a Chapter 7 proceeding. In a reorganization or repayment bankruptcy, you can often create a plan to continue paying secured debts to retain the collateral.
  • Unsecured debts aren’t associated with collateral. In a Chapter 11 or 13 bankruptcy, you typically make a repayment plan that involves paying at least some unsecured debt before the rest is discharged.
  • Priority debts can’t be discharged and may need to be addressed first in any repayment plan. Examples include a certain amount of employee wages and some types of tax debt.

A business bankruptcy lawyer can help you understand how specific types of debts fit into a potential bankruptcy plan. That includes vendor and supplier debts, payments related to corporate leases, and debts guaranteed personally by a business owner.

5. Prepare and Organize Financial Records for the Bankruptcy

You’ll need to work with your bankruptcy legal team to gather information and financial records to ensure your petition is complete and accurate. Bankruptcy petitions can be complex, and it’s critical to ensure that you include all relevant debts. If you miss a debt and don’t include it in your petition, you don’t get the protection of bankruptcy related to that account.

6. Understand How Your Business Structure Impacts Bankrupcty

Talk to your bankruptcy lawyer about how your business structure might impact bankruptcy decisions. Business organization helps determine how much personal protection you have, for instance. If you own a business as a sole proprietor, you may need to plan to protect your personal and business assets during bankruptcy.

7. Determine How Bankruptcy Impacts Various Stakeholders

Consider how your bankruptcy filing may impact employees, business partners, vendors, and clients. Create a proactive communication plan to provide stakeholders with relevant, timely information about your business actions and how they might be impacted. This is especially important with reorganizaiton or repayment plan proceedings, as you likely want to protect your brand and support ongoing relationships.

8. Create a Strategic Plan for Post-Bankruptcy

Have a plan for after bankruptcy, even if you are dissolving your business. Even if you’re liquidating your business, you still need a plan for handling any loose ends and personally moving on with your life and career. If you’re looking at a Chapter 11 or Chapter 13 business bankruptcy, it’s essential to have a plan for better financial management. Consider the causes of your current financial struggles, identify potential risks for the future, and create proactive plans to address those issues.

Consult With a Business Bankruptcy Attorney

Business bankruptcy can be a complex process, and you must consider many factors before starting. Business bankruptcy lawyers can guide you throughout the bankruptcy, from choosing the right petition type to managing trustee negotiations and repayments. Call Gillespie & Murphy, P.A. at 252-659-5045 to discuss business bankruptcy options for your North Carolina company.