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When Is Bankruptcy the Best Option?

  • 23 October 2013
  • Author: ellice909
  • Number of views: 3904
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When Is Bankruptcy the Best Option?

“Do I really have to declare bankruptcy?” It’s a gut-wrenching thought. More than 500 Texas businesses declared bankruptcy in the first quarter of 2013, according to U.S. Court statistics. Personal bankruptcy filings were logged in the thousands. Could these have been avoided? When does bankruptcy become the best option?

We’ve learned that there are often more questions than answers when it comes to bankruptcy. But there are some considerations that can help frame a path to your solution. While the information here should never replace an individual professional consultation -- with us or a bankruptcy attorney -- the suggestions are a starting point as you weigh your decisions.

First, it’s important to understand that bankruptcy will not make your IRS problems go away. Taxes, loans, mortgages and other ‘secured’ debts will usually still need to be paid. Beyond that, keep these considerations in mind:

  1. Understand the different types of bankruptcy filings in order to determine if any present a viable option. Should you liquidate the business (Chapter 7) or would you hope to reorganize (Chapter 11 or Chapter 13)?
  2. Know your state laws. While bankruptcy is mostly a Federal issue, each state has slightly varying laws and regulations – at times making bankruptcy too high of a risk when it comes to preserving personal assets. In Texas, you may choose to adhere to Federal exemptions or Texas exemptions (but not both). Before deciding, consider Texas’ generous Home Exemption and Motor Vehicle Exemption. Also consider what will be considered business assets versus personal. If you declare bankruptcy, your laptop and even your client list may no longer belong to you.
  3. Put together a 6 month plan. See if you can pay off a credit card or two within that time. Also, decide what creditors you’ll need in your business for it to survive, and reduce all other expenses. You could even try negotiating the terms of these other expenses outside of bankruptcy, which should be viewed by those creditors as a far better option than dealing with a bankruptcy court.
  4. Don’t stop paying your payroll taxes and other secured debts. There are certain taxes that just cannot be forgiven. Payroll tax is one. The IRS considers nonpayment of payroll taxes a civil penalty and will hold the business owner (and other “responsible persons”) personally liable for payment, even in the event of bankruptcy and even if the business is a partnership or corporation.
  5. >Don’t over-react. No one – not even the IRS – takes pleasure in forcing decent, hard-working business owners out of business. Plus, bankruptcy is certainly not an easy way out. Take the time to weigh your options with the appropriate professionals before making a move.

Of course, it’s best to avoid facing the bankruptcy decision altogether. So we suggest building a contingency plan while your business is strong and healthy. When we put together asset protection plans for clients, we run test scenarios to see if they will hold up against bankruptcy. Oftentimes, we’ll send the plan to a bankruptcy attorney for review to make sure it’s airtight. Contingency planning for the worst case scenario is crucial. Plus, if your asset protection holds up to theoretical bankruptcy, it will likely survive any typical creditors that cross your path.

Image credit: carballo / 123RF Stock Photo

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