Closing a business through bankruptcy is a delicate and complex process that requires taking a step back to look at the situation before deciding to file a bankruptcy petition. You have to determine if you can reorganize the operation or liquidate all the assets and close it for good. As you work on the bankruptcy, you’ll face temptations to make decisions that wind up turning into mistakes and derail your attempt to get out of the debt. This and other reasons are why you need expert bankruptcy legal advice to eliminate your business debts and have the opportunity to start fresh. Here are some common mistakes to avoid when filing for bankruptcy in Alabama.
Spending Money on the Business
You may decide to have one last try at keeping the business going, or you may feel a need to spend down the money left in the business for various reasons. This is a major mistake because bankruptcy courts will view this as an attempt to avoid paying creditors, especially if you don’t have a valid reason to spend money. The trustee handling your bankruptcy proceedings may decide to claw back the money you’ve spent. A clawback, or voiding a transaction, is an attempt to get money back and distribute it to your creditors.
The last thing you want during bankruptcy is a clawback, as it slows down the bankruptcy process and complicates the overall situation. Stop spending money once you’ve determined that the business is no longer viable. You can take care of outstanding debts to the best of your ability and take care of payroll, but you can’t make large purchases or spend on unnecessary services. This is the point where you need to contact a bankruptcy lawyer and begin the conversation about your options for closing down the business and clearing its debts.
Selling off Assets
It’s a normal and rational response to sell off company assets in an attempt to generate cash, but it’s not a good idea if you’re planning on filing for bankruptcy. One of the aspects of bankruptcy is the selling of assets to accrue cash for the repayment of business creditors. When you sell off business assets within 90 days prior to filing for bankruptcy, it may be viewed as a fraudulent transaction by the bankruptcy trustee.
The circumstances surrounding the sale of the assets as well as the person or entity who bought the assets, will be investigated by the trustee. If the trustee finds that the transaction was not legitimate in that it was sold to a family member or friend, or more than $600, the trustee may initiate a clawback.
Filing Under the Wrong Chapter
Businesses are allowed to file under two chapters of bankruptcy only: 7 and 11. Chapter 7 bankruptcy is for businesses that are permanently closing their doors and are seeking to liquidate their inventory and assets. A business that wants to reorganize its debts and can demonstrate that it’s capable of reorganization can file under Chapter 11.
It’s easy to make the mistake of filing for Chapter 13 instead of Chapter 11 or 7, especially if you’re filing without the help of a lawyer. This mistake can be costly in that it can get your petition rejected, cause you to lose your filing fees, and make you re-do the petition. You have to re-file and pay the filing fees for the correct chapter of bankruptcy.
Repaying Preferred Creditors
This is also known as an inside transfer, and it consists of paying back people who invested in the company prior to the bankruptcy. It’s an understandable action, but the bankruptcy court won’t look kindly on your actions and may claw back the money. The bankruptcy proceedings are designed to repay creditors as equally as possible, and investors can place a claim with the trustee for payment. It’s best to let the trustee handle the repayment of creditors, as this helps your bankruptcy proceed smoothly.
Hiding Assets
This is a major temptation, especially because there may be assets that are valuable or you don’t want to let go of for various reasons. However, the possibility of the trustee finding out that you attempted to hide assets is high and isn’t worth taking the risk. You can get your bankruptcy petition denied and open yourself up to prosecution.
It is far better to ask the trustee for the opportunity to purchase the desired asset from the estate. This is something that you should talk over with a bankruptcy lawyer to learn more about potential strategies for buying the asset and avoid getting into trouble.
Not Listing All Creditors
In the event you forget to list a creditor, you may find that you wind up owing the entire amount of the debt after the bankruptcy has been discharged or reorganized. There are some debts that survive bankruptcy, but you don’t want to find out the hard way that you owe a large debt that should have been included in the bankruptcy.
It’s possible to file what’s known as an ex parte motion to reopen the bankruptcy and add the creditor that was overlooked. However, this requires asking a judge to consider your request and reopen the bankruptcy for the sole purpose of amending the petition. You’ll need the help of a lawyer to get the motion written correctly and filed. It’s also wise to let the lawyer represent you in front of the judge to improve your chances of adding the creditor.
Putting Off Getting Legal Help
Recognizing the point of no return for a non-viable business is hard, but waiting to decide to file for bankruptcy makes the closure or reorganization more painful. The sooner you recognize the fact that you can’t keep the business going means you will end the suffering sooner rather than later. Talking to one of our bankruptcy lawyers at Grainger Legal Services in Montgomery, AL, about filing a business bankruptcy can help you create a strategy to bring the business to a close in a fashion that satisfies the court. Call us today to learn more about the benefits of filing a business bankruptcy.
Speaking to a bankruptcy lawyer about your need to file bankruptcy for your business can help you find peace of mind and take the stress off your shoulders. In some cases, bankruptcy doesn’t have to be filed immediately and can give you the time you need to deal with the situation at hand. Meanwhile, the lawyer provides you with rational support that helps you maintain control of the situation until it’s time to file the bankruptcy petition and file under the chapter that makes the most sense for your business.
