Filing a bankruptcy can be emotional and stressful, even in business. For many, it means that the business failed to operate as they intended. With any decision involving emotions, it is wise to proceed carefully so that you don’t overlook something or make a mistake that ends up making the process more difficult.
To help you, we’ll discuss what you should know before your business files a bankruptcy. We will also discuss the steps to file a bankruptcy for your business, as well as some common mistakes that businesses make when filing a bankruptcy, so that you’re better prepared to manage the process.
What Should I Know Before Filing for Bankruptcy?
The first thing to decide is what type of bankruptcy is right for your type of business. If you are unsure, speaking to an attorney like those at Gillespie and Murphy can help.
Generally, there are three types of bankruptcy that a business may consider. They are:
- Chapter 7 Bankruptcy
- Chapter 11 Bankruptcy
- Chapter 13 Bankruptcy
A Chapter 7 bankruptcy is what you would file to close the business. It involves liquidating the business’s assets with the express purpose of paying down as much of what is owed to creditors as possible.
A Chapter 11 bankruptcy is appropriate if you want to reorganize your business and stay in business. It involves restructuring your debt so it is affordable and eliminating debt that you cannot pay. Rather than wrap up the business, as in a Chapter 7, you would continue to operate as the newly reorganized entity.
A Chapter 13 bankruptcy allows a sole proprietorship to be reorganized. A Chapter 13 bankruptcy is usually a personal bankruptcy for consumer debt, but it can be used for a sole proprietorship in certain circumstances. A Chapter 13 bankruptcy will often reduce your debt and structure it into monthly payments that are within your means.
Certain types of debt cannot be discharged in a bankruptcy or must be paid in the bankruptcy. It is important to know, before filing, whether or not the bankruptcy will eliminate the debt or whether you must pay the debt out of future revenue. If you are unsure of whether a Chapter 7, Chapter 11, or Chapter 13 bankruptcy will eliminate certain debt, it is best to contact a North Carolina business bankruptcy lawyer.
What Are the Steps to Filing for Business Bankruptcy?
The steps that your business will follow to file for bankruptcy depends on which type of bankruptcy is right for your specific situation. Figuring out what to file is best done with the help of an attorney. With that said, the basic steps for filing bankruptcy as a business are as follows:
- Your attorney prepares and files a bankruptcy petition with the bankruptcy court, which you review and sign, triggering an automatic stay to protect your business from creditor action while the bankruptcy process is ongoing
- Your attorney works with you to file all required documents identifying your business assets, liabilities, etcetera
- Your attorney prepared and files a business reorganization plan
- Your creditors and the court review your reorganization or repayment plan and can agree or object to the plan
- After your plan is confirmed by the court, you begin paying creditors according to the plan. Some of your debt may be discharged by the court
- It is sometimes necessary to file a personal bankruptcy if you are personally responsible for business debt
If you think your business may need to file a bankruptcy, but aren’t sure if it is right for you, start collecting the essential business records that you’ll need for the process. Documents that you will be required to provide include:
- Income, employment, and business tax information
- Income statements and balance sheets for two or more years
- Statements regarding business debt or a list of business debts
- Accounts receivable details
- A list of assets owned by the business including real estate, inventory, equipment and other personal property
- Bank statements
- Any other documents related to debt, income, or the net worth of your business that haven’t been listed above
What Are Some Common Mistakes Businesses Make When Filing for Bankruptcy?
There are plenty of mistakes that can make the process more of a hassle than it needs to be. Mistakes such as;
- Continuing to use the company credit cards after you’ve made the decision to file bankruptcy. This can result in purchases being deemed non-dischargeable.
- Treating family members’ debts as more important than creditors (called “preferences”). This can result in the money being reclaimed from the family member.
- Liquidating your retirement account. Most retirement accounts are protected and exempt in bankruptcy and liquidating the accounts is a waste of your money.
- Transferring property to a different entity or family member. This can be undone if it was made within two, and sometimes four, years of filing bankruptcy.
- Borrowing additional money or adding a second mortgage to pay off debt that you have already incurred. This just results in a cycle of debt, for starters, and it can be a fast way to lose a valuable asset that you might not have otherwise.
- Failing to appear in court proceedings. If a creditor has sued you, ignoring the problem may make a bankruptcy more difficult. Filing a bankruptcy may prevent serious consequences.
- Failure to disclose all the relevant information to your attorney. Your bankruptcy attorney is your best friend in this process and they’re going to do everything they can to help you through it. But they can only do that if you tell them the whole truth. Failing to disclose information can result in serious consequences that your attorney couldn’t have foreseen to warn against.
Do I Really Need a Bankruptcy Attorney?
A bankruptcy attorney, like those you’ll find at Gillespie and Murphy, can make this process much easier. Rather than lose days researching your options, an experienced attorney can walk you through them, answer your questions, and provide you with advice tailored to your specific circumstances. If you are considering filing for business bankruptcy, reach out to Gillespie and Murphy to see how they can help.