Once you have crunched the numbers and decided there's no point in negotiating with your creditors — either because there are too many of them or they refuse to negotiate — you have to consider whether a bankruptcy filing is the only way out.
Here are your options:
Dissolution. If you are a corporation or limited liability company and you have no debt that is personally guaranteed, you can terminate your company's existence by filing articles of dissolution with your state secretary of state office. Once these are filed, you sell all of your company's assets and use the proceeds to pay all of your creditors pro rata (based on their percentage of the total). Whatever you cannot pay them simply goes away, except that some states (such as New York) will impose personal liability on you if you fail to pay wages and benefits owed to your employees in the dissolution process.
Assignments for the Benefit of Creditors. Sometimes called state law bankruptcy, or ABC, this informal process for liquidating business assets is less expensive and time-consuming than a bankruptcy filing. Basically, you transfer all the business assets to an assignee — usually a local attorney or retired judge — who negotiates with your creditors, sells the assets, takes his or her fee off the top, and distributes the rest to your creditors.
An ABC is ideal in situations where you and all your creditors agree there's no point in continuing the business and everyone cooperates. The bad news is that in some states, even a successful assignment will not result in a discharge of unpaid debts or freeze a creditor's collection efforts. Check with a local attorney before pursuing this route.
Reorganization. If you think there's a chance you can keep your business alive if your creditors agree to a blanket settlement of their debts, you should consider filing for reorganization under Chapter 11 of the federal Bankruptcy Code. This will freeze any collection efforts your creditors may have started and buy you time to develop a plan for paying them, which will include some forgiveness, some extension of the payment schedule or a combination of both. Your creditors will have to appoint a committee, which will approve the plan of reorganization.
Any debts that are not dealt with in the plan of reorganization are discharged permanently, meaning some of your smaller, crazier creditors may be left out in the cold.
Chapter 11 reorganizations are costly and time-consuming, although a new small-business reorganization subchapter has just been added that may streamline this process. That will be the subject of next week's column.
Liquidation. This means you are going out of business completely. If you are a sole proprietorship, you can file for liquidation under Chapter 13 of the federal Bankruptcy Code. If you are a family business engaged in farming or fishing, you can file for liquidation under Chapter 12. If you are any other type of business (even a single-member LLC), you must file for liquidation under Chapter 7 of the federal Bankruptcy Code.
In a liquidation proceeding, a trustee is appointed for your business. Your trustee supervises the orderly liquidation (sale) of your business assets and distributes the proceeds to your creditors based on an established pecking order. Secured creditors are usually allowed to seize their collateral and sell it for what it's worth. Everybody else gets a percentage of the remaining pot, and any debts that are not paid in full after all of your business assets have been exhausted are permanently discharged. If you have personally guaranteed your company debt, those creditors can still pursue them against you and your personal assets.
Bankruptcy proceedings should never be undertaken without the assistance of an attorney who specializes in this area of the law. Your attorney fee is considered a priority claim in the bankruptcy proceeding, meaning he or she will be paid before any of your creditors get a nickel. For this reason, many attorneys will help you out for a small upfront fee.
Is There Life After Bankruptcy? Bankruptcy proceedings are not to be undertaken lightly.
First of all, some debts cannot be discharged in bankruptcy. These include student loan debt, alimony and child support payments, and tax liens owed to the federal government. You may be able to work out a payment schedule for these as part of the proceeding, but there's no guarantee. If you are stupid enough to reaffirm a debt — promise the creditor it will get paid even though the debt has been formally discharged — after the bankruptcy proceeding, the discharge in bankruptcy will be lifted for that debt.
More importantly, your credit will be shot. Bankruptcy proceedings stay on your credit report for seven to 10 years depending on the credit reporting agency and will stay on the internet for much, much longer. It will take years for you to rebuild that credit standing, which may hinder your ability to start fresh with a new, debt-free business.
Bankruptcy should be considered only a last resort.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.
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