Avoiding Business Bankruptcy Traps
If you own a small business or are self-employed, filing for bankruptcy will require some preparation on your part to avoid some most common bankruptcy traps. Let’s take a look at a few of the possible issues:
Client Issues
If you’re working with clients during your bankruptcy, speak with your bankruptcy attorney to find out how you can protect some of your cash assets. Accounts receivables and contracts for ongoing (but unfinished) work may look enticing to the bankruptcy trustee. The trustee will want the accounts receivables to pay creditors and he may try to seize contracts for unfinished work too. Unfortunately, if the bankruptcy trustee seizes cash from accounts receivable this could create trouble for a debtor trying to get a fresh financial start. To avoid this issue work with your bankruptcy attorney to protect these assets.
One strategy to protect accounts receivables and contracts for uncompleted work is to cease working while in bankruptcy. To do this successfully, the debtor will need to pay for essentials such as rent, food, utilities and supplies in advance, before filing bankruptcy.
Employee Issues
Before you file bankruptcy, make the decision about how you will handle existing employees. Failing to pay employees before filing bankruptcy will only create a new creditor claim and alienate workers. If you have the cash it’s allowable to pay your employees before filing bankruptcy. Also, if you’re going to lay off employees, work with your bankruptcy attorney to do so in the most effective manner. If you want to continue operating your business during bankruptcy, don’t layoff essential employees, instead layoff those who you can survive without.
Inventory Issues
If you have a retail or wholesale business that depends on suppliers, paying vendors before and during your bankruptcy is essential to surviving the process. Develop a strategy to make vendors feel comfortable extending credit to you during the bankruptcy case. And work with your bankruptcy attorney to develop a pre-packaged bankruptcy deal with vendors so that there is no interruption in your supply chain. One of the biggest issues faced by companies such as Borders (now closed), was that vendors lost faith in the company’s ability to survive. Because they had no faith in Borders’ ability to survive, they did not feel comfortable extending credit to them. They would only do business with cash. You don’t want this to happen during your bankruptcy. Come up with a plan to let vendors know that your company is in fact variable and there is a good chance that they will be paid after bankruptcy.
Control Issues
While business bankruptcy debtors have the right to control their finances during the bankruptcy process, if they fail to show that they are competent that control can be taken away. Business bankruptcy debtors should make sure that all finances and bookkeeping is handled professionally so that they don’t provoke a bankruptcy trustee into taking control of their company’s finances.