24 Nov Will bankruptcy help struggling business?
When you consider filing bankruptcy for a small business, you need to figure out what’s wrong, before you choose a remedy.
So, the second of my five questions for a client with a troubled business is Could the enterprise prosper if it wasn’t servicing old debt?
Often, recent improvement in operations is masked by the amount of debt it is servicing from past, less robust periods. Today’s income is paying yesterday’s expenses.
I want small business people to look at current operations and current expenses. Can revenues this month cover the expenses of this month’s operation? If so, there may be a future.
Corporations and LLC’s
This analysis is most powerful where the enterprise s is a corporation financed on the owner’s credit cards. Most often, the corporation is not actually liable on the credit card. The corporation’s name may be embossed on the plastic, but the corporation has not signed an application for credit. It’s really the owner, the shareholder, who is liable to the credit card company.
When that’s the case, the corporation can stop paying on the credit cards with no consequences to the entity.
A bankruptcy by the owners will not directly affect the corporation at all. The owner’s bankruptcy estate will include the stock in the corporation, but not the business itself. The operation can continue during the owner’s bankruptcy. If the business is struggling, it usually has no value that interests a Chapter 7 trustee.
When the business is a sole proprietorship, a Chapter 13 may leave the owners in control of the business, with all of the debt existing at the point of bankruptcy filing included in the bankruptcy and slated for discharge at the end of the plan. Current income is available to pay the current expenses; the debt from the past does not need to be paid, except as provided in the Chapter 13 plan.
Image courtesy of island home.
Cathy Moran, Esq.
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