Keeping Your Business Open Through Bankruptcy

Keeping Your Business Open Through Bankruptcy

Filing for bankruptcy can be scary, but it doesn’t have to mean the end of your business. With some planning and legal help, you may be able to keep operating your company even after declaring bankruptcy. This article will walk you through some of the key things to think about.

Chapter 7 vs Chapter 13 Bankruptcy

There are a few different types of bankruptcy you can file as a business owner. The two main ones are Chapter 7 and Chapter 13. Here’s a quick rundown:

• Chapter 7 – This is known as “liquidation” bankruptcy. It wipes out many of your personal and business debts, but typically requires you to shut down your business and sell off its assets to pay creditors.
• Chapter 13 – Also called “reorganization” bankruptcy. It allows you to keep operating your business while repaying some debts over 3-5 years. More business-friendly overall.

As you can probably guess, Chapter 13 will usually be the better option if your goal is to keep the doors open. Chapter 7 tends to lead to dissolving the business. But there are some exceptions, so let’s dig deeper.

Sole Proprietorships in Chapter 7

Filing personal Chapter 7 bankruptcy as a sole proprietor can sometimes let you keep running the business. This is because your company isn’t a separate legal entity – it’s treated as an extension of you. So exempting business assets from the bankruptcy may be possible, allowing you to hold onto them.

The key is whether you can fully exempt your business assets using state or federal exemption laws. For example, some states let you exempt tools of the trade up to a certain value. If you can exempt everything tied to the sole proprietorship, the Chapter 7 trustee has no reason to liquidate. Just be sure to check your state’s exemptions closely and understand what you can protect.

Partnerships and LLCs in Chapter 7

If you have a partnership, LLC, or corporation, Chapter 7 gets more tricky. These businesses exist independently from the owners, so they have to file for bankruptcy separately. And when the company itself files Chapter 7, it almost always means liquidating and closing up shop. The trustee simply seizes and sells all business assets to pay off debts.

Trying to exempt the company’s valuable equipment or inventory from Chapter 7 probably won’t fly. The trustee examines things like:

• How much income the assets produce
• If they’re really necessary for day-to-day operations
• What creditors could get for them if sold off

Unless your business has little equity or very few sellable assets, Chapter 7 will likely sink it. A pro business bankruptcy attorney can look at your specific situation and options here.

Getting More Mileage from Chapter 13

Filing personal Chapter 13 bankruptcy is often the best bet for keeping a business afloat. The main perks are:

• You can include both personal and business debts in the filing
• Lets you hang onto all assets and equipment while repaying debt over time
• More flexibility in dealing with leases, contracts, etc.

The catch is that you’ll need consistent business income to make the required Chapter 13 plan payments. But if your company is still generating decent cash flow, Chapter 13 can work well.

One potential hiccup is the bankruptcy trustee may think your business assets are too valuable to retain. Like if you have a high inventory value or expensive equipment eating up equity. The trustee can argue some of it should be liquidated to pay more to creditors. But a good lawyer can often find ways to structure your repayment plan to satisfy the trustee and still keep operating.

Steps to Help Keep Your Doors Open

Here are some proactive steps you can take to improve the chances of keeping your business alive through bankruptcy:

1. Consult an attorney – Getting expert advice tailored to your situation is crucial for navigating the process successfully.
2. Act quickly at signs of trouble – Filing sooner often gives you more options, before things deteriorate too far.
3. Consider restructuring debt first – This can shore up cash flow and avoid bankruptcy altogether.
4. Shift ownership of key assets – Transferring assets to co-owners, etc. can protect them if you do file.
5. Lease rather than purchase equipment – Leased assets don’t become part of the bankruptcy estate.
6. Set up retirement accounts – Certain accounts are shielded from creditors and bankruptcy.

The more you can do to prepare on the front end, the better your chances of emerging intact. Just be sure to get legal advice before attempting any major restructuring.

Personal Bankruptcy Fallout

Even if you manage to preserve the business through bankruptcy, some personal consequences will follow you. These include:

• Damaged personal credit – Personal bankruptcy wrecks your credit score for years.
• Potential tax liability – Any discharged debt could be treated as taxable income.
• Limited financing options – Post-bankruptcy access to business financing can be very limited.
• Possible court oversight – The court may impose ongoing reporting requirements.

Be prepared for the bankruptcy to make your financial life more complicated for some time. On the bright side, you’ll typically get a discharge from most unsecured debts and get to start fresh.

When to Throw in the Towel

Sometimes continuing to run your business through bankruptcy doesn’t make good business sense. If revenues are way down, profits are nonexistent, and there’s too much debt to restructure, it may be time to cut your losses. Liquidating and closing up shop, while painful, can be the most prudent option.

Signs it may be time to close down include:

• Losing major customers or contracts
• Falling far behind on payroll and vendors
• Hemorrhaging cash every month
• Falling too far behind competitors
• Losing your passion for the business

Don’t waste time and money trying to salvage a business that’s too far gone. Be realistic about the prospects for turning it around post-bankruptcy. You can always take what you’ve learned and start fresh someday with a new venture if the opportunity arises.

Bottom Line

Filing for bankruptcy doesn’t automatically mean shuttering your business for good. With Chapter 13 bankruptcy, strategic planning, and legal guidance, you may have options for keeping the doors open. Be sure to fully understand the pros, cons, and feasibility of this path for your particular situation.

While allowing a failing business to go under can be heartbreaking, sometimes it really is the most prudent financial decision. Don’t throw good money after bad trying to salvage the unsalvageable. But also don’t assume bankruptcy means automatic business death – with the right strategy, you can come out intact.