Bankruptcy Considerations When You Are Closing Your Business
Your business is failing, or has failed. You know it’s time to wind down your affairs, given that the business is not only not profitable, but has also incurred a fair amount of debt that neither you nor the business can afford to pay. But how do you wind down your business—especially if you think you may also need a bankruptcy, either for yourself or for the business?
List All Debts
Remember that bankruptcy will wipe out contingent, possible, or future lawsuits. That means that if you have a failing business and are going to wind it down, and you file for bankruptcy, you should include (list) everybody that could possibly sue you or ask you for money related to the business–even if they haven’t actually made any demands on you for money yet. Be forward-thinking and ask, “who could say that I owe them money, in the future, related to this business?”
Follow Your Documents
You will probably want to consult with your corporate documents—bylaws, operating agreements or partnership agreements. They often will have a procedure that details how to wind down the business. Make sure you are following these procedures.
Good Advice? It Depends
Winding down your business when you are considering a business bankruptcy can present a few problems and conflicts.
Traditionally, a good strategy in winding down your business is to pay the accounts or debts that you can pay and work to liquidate or sell your assets to pay as many creditors as you can. Additionally, traditional advice may be to collect on all accounts receivables, even if you have to accept them at a discount, just to get some immediate cash flow to help you pay expenses related to winding down.
However, this may not be a wise strategy if you are contemplating bankruptcy. Bankruptcy court may see these as fraudulent transfers, or you “choosing” some creditors (the ones you can and do pay) over others. This is not allowable in bankruptcy.
Remember that your bankruptcy will discharge debts related to anything you do as head of your business. That means, for example, if a shareholder or an officer or member of the business doesn’t like the decisions that you made, or how you ran the business, the shareholder’s claim will be discharged in bankruptcy.
However, bankruptcy won’t discharge claims related to fraud. That means that you should be as open and honest as possible, and avoid anything at all that could even give the perception of impropriety so as to avoid the risk of a lawsuit being filed against you that alleges some kind of intentional, fraudulent behavior.
Who Owes What?
Remember if you personally owe a debt, but only the business files for bankruptcy, you won’t get a discharge. Make sure you know who exactly owes money–whether it’s you personally, a spouse, the business, or a business’ subsidiary or corporate partner.