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Unfortunately, sometimes thing do not go as planned. You are a business owner who finds himself or herself unable to pay the bills. Should you declare bankruptcy? It depends upon a number of variables.
This article addresses business bankruptcy and not personal bankruptcy, although the two are often intertwined.
There are two basic types of insolvency filings that a business can undertake. The first is known as Chapter 11; in this instance, a petition is filed with the Court, and a plan of reorganization is worked out. It is the intention of the owners to stay in business, and the plan of organization stipulates how the debt prior to the filing of the bankruptcy petition will be satisfied. The so-called “magic stay” of bankruptcy applies in that upon the filing of the petition any and all actions by the creditors are immediately halted as a matter of law. The second type of filing is a Chapter 7, which calls for the liquidation of the business; the assets are sold and debts are satisfied in accordance with the priority of claims as set by law.
As a business owner, there are a number of pitfalls that you should be aware of prior to filing a Chapter 11 petition in Court. First and foremost, bankruptcy is expensive. In the U.S., it costs money to stand up in Federal bankruptcy court and proclaim that you are broke. It can cost several tens of thousands of dollars to millions to see a Chapter 11 through from the initial filing of the petition to approval of the plan of reorganization. Your attorney and C.P.A. will want a large retainer prior to the filing of the petition since subsequent to the petition being filed, the professionals must petition the Court in order to get paid. Be aware too that professional fees as a matter of law have priority over all creditors that existed prior to the filing of the petition.
In addition to requiring a great deal of legal work, there is also a great deal of accounting work associated with Chapter 11. If you have $2.19 million in debts or less, you will be able to file as a small business; you will still be required to filed monthly operating reports with the Court, but the report required is shorter than is the case if the debt was larger. Your accountant is also going to have to be heavily involved in the payment of the bills as you go forward after the filing of the petition since the Court will disallow preference payments and payment of prior debt outside the plan. There must be what is known as a contemporaneous exchange of new value.
Chapter 11 usually does not work for businesses with less than $10 million in sales because even if a plan of reorganization is approved by the Court, smaller businesses usually are not able to make the payments required on a consistent basis. If the payments are not made in accordance with the plan, Chapter 11 often converts to a Chapter 7 and the business is liquidated. That said, after filing for Chapter 11 there will be a significant number of lenders willing to lend to you since debt acquired after the petition is filed has priority over existing debt. Good luck and get a good bankruptcy attorney and insolvency accountant.
Good luck and get a good bankruptcy attorney and insolvency accountant.
This article is not meant to be a rendering of legal, accounting, financial or other professional advice. Seek competent professionals with expertise in each of these areas when considering bankruptcy.
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