Three Bankruptcy Traps for Small Businesses

25 Jul Three Bankruptcy Traps for Small Businesses

Perhaps you’re self-employed. Or maybeyouown a small corporation or LLC. Times are hard. Time to see a bankruptcy attorney.

You might be surprisedto realize that thesetwo items are considered assets: accounts receivable and unbilled work in progress. A trustee can try to take these by telling your customers to pay him instead. This will definitely interfere withyour fresh start. You won’t have cash to begin your new life.

A trustee will have a hard time turning your work in progress into cash. It will depend on how close to completion the job is. It’s something to consider. The accounts receivable, however, is just a demand letter to the customers. Easy peasey.

A forced vacation is a practical way to work around these two concerns. You spend the receivables as they come in for your fixed expenses. Instead ofgenerating new receivables for your trustee, you’ve taken a well-deserved break until after your bankruptcy case is filed.

A third concern is that customers ofongoing contracts or projects(the work not yet in progress) are creditors and must be listed as such. The contracts themselves also must be listed as executory contracts. There’s no easy work-around for this other than that same vacation.

It’s scary to face the prospect of an empty pipeline, but it’s either that or money to the trustee for your creditors. It’s alsoprettyembarrassing and will require lots of phone calls when your customers learn of your bankruptcy before the job is done.

Everyone is having a hard time. Your customers will hopefully understand that their jobs will be completed. In fact, you have a better chance of doing that after your old debts are gone because the creditors can’t chase you and grab your cash or equipment.

Here is where experience counts. A lot. Ask your attorney about these points. Let the lawyerearn your trust.

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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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