10/6/2015 0 Comments
If you are a small business owner at the end of your rope wondering how you can afford your bills, pay your employees, and somehow afford to put food on the table things may seem bleak. It’s very normal to feel discouraged and to consider drastic measures to help out in the midst of your business struggles. However, declaring bankruptcy prematurely, or declaring the wrong kind of bankruptcy can be a serious oversight that leads to all kinds of unwanted situations.
Therefore, if you are a small business owner who is struggling and considering bankruptcy, there are some very important things you should consider first:
Is Bankruptcy truly the right option for you?
One thing that many small business owners need to know about (and unfortunately don’t) is that there are other options besides bankruptcy if you are having problems meeting the financial obligations for your business and have exhausted all other funding options. Due to the troubled economy since the recession, the government has enacted a program called America’s Recovery Capital (ARC) Loan Program. This programs entire existence is to help small business owner unable to pay back debt and meet other financial obligations due to economy’s larger problems.
Some basic details of the program include:
· All loans granted by the program are guaranteed by the SBA and are interest free. There are no fees at all that are associated with ARC loans.
· You must be a for-profit business currently in need of help with your current debt.
· Loans can be awarded in amounts up to $35,000. All loans are deferred for the first 12 months and then are paid back over a long 5-year period.
Besides the ARC, you should always reach out to any creditors you are having a hard time paying back to attempt to renegotiate a new payment plan. Many creditors would much rather work with someone actively trying to payback their debt over a longer period than deal with the hassle and cost of pursuing collection options if the loan defaults.
Lastly, while it may take swallowing pride appealing to friends and family for a short-term small loan is still a much better option than letting your business fail. Friends and family are far more likely to help out with a loan when they see you working for your business and believe in what you are doing – so use these things to your advantage.
If you declare Bankruptcy, what are your options?
Many small business owners do not realize that if they do decide that bankruptcy is their best option – they still have more choices to make. There are three basic kinds of bankruptcy options that you will have if you decide to file. These vary in how much of your assets and your business you are allowed to retain as well as how much debt is permanently stricken from you record, etc.
LIQUIDATION (CHAPTER 7)
Although this type of bankruptcy is not as easy to file for a business after the Bankruptcy Abuse Prevention Protection Act of 2005, it is one of the best options for a sole-proprietor who may also be personally responsible for some of their business’s debt when it is clear the business will likely not survive.
With a liquidation bankruptcy, after the petition is filed and a list of all creditors presented to the court, a trustee will be appointed who will meet with the creditors and reach settlements with each. Next, the trustee will sell-off, or liquidate what assets the company has in order to pay its debts. Once all these assets have been sold and the funds exhausted, any remaining debt will be discharged and the business will permanently cease operations.
REORGANIZATION (CHAPTER 11)
Contrary to liquidating all assets and ending the business, filing Chapter 7 allows businesses to continue to operate only under a new reorganization plan. Like with 7, the court will appoint a trustee to oversee the reorganization of the business and its operations until all debts are repaid.
Though any business is eligible to file for chapter 11, it is most often used for businesses that are viewed as having “goodwill” towards their communities whose value to that community exceeds the sum of the business’s assets.
WAGE EARNER’S PLAN (CHAPTER 13)
While Chapter 13 is not available to all businesses, any sole-proprietorship or unincorporated non-partner business model is eligible to petition for it. When filing a Chapter 13 petition, business owner come to court prepared to outline a repayment plan for all the debt they cannot currently afford to pay. This plan should:
· Have debts paid off within 3 – 5 years of the original payment plan
· Be based upon the actual verifiable income of the business owner.
By filing Chapter 13, a business owner may retain their personal assets (home, car) that would otherwise be sold if petitioning for a Chapter 7 bankruptcy. Owners are also protected from harassment from creditors during this time as well.
Things to Consider
When filing for a bankruptcy, it’s important to keep in mind there are tax implication you’ll need to take care of as well. Even cancelled debts are still subject to taxes.
Though bankruptcy has a very ugly stigma and should remain a last option always, it may actually bring some relief. Recent studies have found business owners who file for Chapter 13 actually increase their annual earnings by nearly $6,000 a year.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.