With the government-mandated shutdowns and loss of business due to the pandemic, you may be thinking about filing for bankruptcy to deal with your company's debt. However, even though bankruptcy is a valid option that can give you a chance to get a fresh start, bankruptcy isn't always the best solution for managing out-of-control debt in your business.
Indeed, there are a number of things you should consider before you pull the trigger and declare bankruptcy. While you should always consult with an experienced business lawyer like us before filing bankruptcy, here are a few facts you should know about the bankruptcy process.
1. It Can Impact Your Personal Credit
The main difference between you and a big corporation filing bankruptcy is that if you use personal bankruptcy (either Chapter 7 or Chapter 13) to discharge or restructure your debt, it will impact your personal credit. In contrast, filing for Chapter 11 bankruptcy, which has mostly been used by large corporations, doesn't hurt the credit of corporate officers or shareholders.
In the past, only large corporations could afford the time and expense associated with Chapter 11 bankruptcy, but recent legislation enacted under the CARES Act has made Chapter 11 more accessible to certain small business owners. Specifically, the Small Business Reorganization Act of 2019, which created Chapter 11, Subdivision V., makes the proceedings more like a Chapter 13 bankruptcy.
Note that business owners filing for Chapter 11, Subdivision V must be represented by legal counsel, so taking this route is still going to require significant expense. Consult with us, as your Family Business Lawyer™, to find out if filing Chapter 11 might be a smart move for your business.
Even with the new rules for Chapter 11, most small business owners will choose to file for personal bankruptcy under either a Chapter 7 or Chapter 13. A Chapter 7 bankruptcy (a liquidation bankruptcy designed to cancel general unsecured debts like credit cards and medical bills, when you have little or no disposable income) stays on your personal credit report for 10 years. A Chapter 13 (a reorganization bankruptcy where you earn a regular income and can pay back at least a portion of your debt through a repayment plan) stays on your credit report for seven years.
For more details on Chapter 7 vs. Chapter 13 bankruptcy, read our previous post, Can Bankruptcy Save Your Business?
2. Bankruptcy Doesn't Cancel All Of Your Debt
While bankruptcy can cancel much of your debt, you'll still have to pay back certain creditors. Debt that bankruptcy doesn't clear include the following:
- Student loans
- Government debts, such as back taxes, fines, or penalties
- Child support and alimony
Remember, every bankruptcy case is unique, and you won't know what debts will be cleared until a bankruptcy court rules on your case.
3. It Will Cost You
Filing for bankruptcy comes with its own costs. According to the latest data, the filing fees for new petitions for Chapter 7 bankruptcy are currently $335, and the filing fees for a Chapter 13 are $310.
In addition to the filing fee, you'll also be required to take a credit counseling and a personal financial-management course, both of which you have to pay for. And if you decide to hire a bankruptcy lawyer, which you absolutely should do if you go the bankruptcy route, you are looking at shelling out anywhere from $800 to $6,000, depending on the type of bankruptcy you file and the details of your case.
Consider Alternatives to Bankruptcy
Before turning to bankruptcy, you should speak with us to see if we can help you restructure your business model and your debt or find potential investors to support you in getting the fresh start you need to keep going. By working with a trusted advisor who can help you retool your business model and put in place sound financial systems, you can find ways to increase your cash flow and plug areas of your business where you are leaking cash.
We often see business owners who have a great product or service and a strong customer base, but they simply haven't learned how to properly manage their financial resources and don't have the right financial systems in place. If this sounds like you, bankruptcy may not be your best option, so reach out to us for recommendations. Meanwhile, review our previous post discussing five ways struggling startups can get a handle on cash-flow management.
Additionally, you should look for ways to restructure your debt and your overall expenses. You can start by contacting each of your creditors to inform them that you may need to stretch out payments or even consolidate your debt load. But don't do this alone. Instead, seek our counsel, so you can have these conversations coming from a place of confidence and strength.
Don't Go It Alone
The economic fallout from the pandemic has crippled countless businesses, but before you make any final decision about bankruptcy, you should meet with us, as your Family Business Lawyer™. We can assess your situation, analyze your finances, and determine your best course of action from an unbiased perspective.
And if it turns out that bankruptcy is your best option, we can recommend bankruptcy lawyers we trust to assist you with the process. Ultimately, the best way to manage debt is to seek financial guidance before things reach the breaking point, but if you find yourself drowning in debt, contact us to determine the best way to keep your operation from going under.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.