For many business owners struggling with debt, bankruptcy provides the best – and often only – solution for keeping their businesses afloat.
However, while a Chapter 11 bankruptcy may be your best option, it is important to remember that, during the time leading up to your bankruptcy filing, there are certain things you need to avoid, including:
- Avoid borrowing money from friends and family: If you borrow money from a family member to pay off business debt, and then file bankruptcy, it is unlikely he or she will get their money back. In fact, even if other creditors receive proceeds from the sale of business assets, your relative may not receive anything since the bankruptcy court may consider his or her initial loan a gift – meaning they are not entitled to the money back.
- Avoid making ‘preference’ payments to certain creditors: If a friend, family member or close business associate lent you money in your time of need, you may want to repay them as soon as possible – but you need to fight this temptation, especially if you think you may file bankruptcy soon. This is because the bankruptcy trustee may consider these payments “preference payments”, meaning these creditors were given an unfair advantage. The trustee will then attempt to take back these payments and divide the funds equally among all of your business creditors. Even worse, if the family member or business associate doesn’t have the money any longer, the trustee may choose to sue them.
- Avoid paying yourself a bonus: If you repay a loan you made to the business or pay yourself a bonus in the months leading up to your bankruptcy, the court may consider this a “preference payment” – and possibly bankruptcy fraud. So just don’t do it.
- Avoid racking up new debt: It is always a bad idea to rack up new debt in the months leading up to a business bankruptcy. After all, if the court thinks you are trying to perpetrate fraud by buying a bunch of luxury services (vacations) or goods right before your bankruptcy, these debts will not be dischargeable.
- Avoid taking equipment from your business: If you decide to take assets from your corporation or LLC before filing bankruptcy, including equipment such as computers, vehicles and supplies, the bankruptcy court may consider this bankruptcy fraud since it believes you are essentially stealing from your creditors. In some cases, such actions can lead to criminal charges or your bankruptcy case being dismissed.
It is important to remember, however, that the information above is just a general outline of some of the many things you should avoid if considering a business bankruptcy. As you can image, there are many nuances and exceptions to nearly every bankruptcy rule and law, which is why you should always contact an experienced business bankruptcy attorney if you have any questions.
A skilled lawyer can help protect your rights and explain everything else you should avoid, in addition to the list above. Don’t delay; take the first step to protecting your business today.