Most of us don’t want to think about the “B” word, much less say it out loud. Small business statistics show that bankruptcy filings were lower last year than they have been in the previous three years. That is good news. Our industry, however, is having a hard time and many of the smaller businesses may be just a few steps away from financial ruin.
Rosemary Peavier, Professor Emeritus in Business/Finance from Morehead State University, has developed five tips to keep your business out of bankruptcy.
1. Cut Your Expenses. All of you have probably done this already. I see you working more hours and harder than you have in years. She suggests short-term cash flow analysis. “Negotiate with your suppliers and creditors. Try to get them to extend your terms. They may work with you rather than to get caught up in bankruptcy court.”
2. Analyze Your Bank Accounts. If you owe money to a bank and have your money in the same bank, the bank can raid your bank account to pay your bill. Keep only enough money in that account as required and place the balance in an account at another bank.
3. Pay Your Payroll Taxes. “It is particularly important to pay your payroll taxes in full and on time. The IRS can and will assess penalties on any unpaid payroll taxes.” If you do go into bankruptcy, this debt will not be discharged.
4. Don’t Try to Hide Your Assets. Family members or friends might tempt you. Don’t. If these assets are discovered, you could be accused and convicted of fraud.
5. Disclose Your Situation. If you try to borrow money to consolidate your debts, fully disclose your financial situation to your lending institution. If you don’t you later could be accused of fraud.
If you are on the edge, contact a bankruptcy attorney. If you do not know where to find one, log on to the website for American Bankruptcy Institute. There is another website also that might give you some interesting information – Getoutofdebt.org.
Depending on the size of your business and the debt involved, there are three different options: Chapter 7, Chapter 13, and Chapter 11
Chapter 7 is the most commonly talked about. By the time a business is on the verge of going under, the bills and money pressures are too much to bear. In a sole proprietorship, you and your business are the same. There is a requirement that many assets be sold to generate some money to repay the creditors. This will make it difficult to continue to operate. Chapter 7 may be the best choice when the business has no future or the debts are so overwhelming that restructuring them isn’t feasible.
Chapter 13 is an option, especially if there are partners involved. The court takes into consideration all the assets and liabilities to then reduce the debt to a manageable amount. The court, giving the business owners 3 – 5 years to pay back the debt, sets up a repayment plan. The business can keep running. This is often the best option for small businesses.
Chapter 11 is meant to give the business a chance to restructure and save it from closing down. If your business owes more than $260,525, you will probably be advised to file Chapter 11. However, you can always file Chapter 7 if you must close down. It is costly and complicated to file this type of bankruptcy.
Bankruptcy could be a new beginning. No one wants to admit they have been less than successful in any endeavor. But as, someone said, “you need to know when to fold them.” If in doubt, consult an expert. It is money well spent.
