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A few days ago, I received an e-mail from Annie, a reader whose previously successful small shop and online jewelry business failed in February. She had numerous outstanding debts at the time she closed her incorporated business. Because the company was a corporation and she understood that this made it a separate legal entity, she presumed the debts would simply go away after she closed the company.
However, when Annie started her enterprise four years ago, she made the mistake of mixing business credit with personal credit. Rather than only using her Employer Identification Number (EIN) when applying for business accounts, she provided her Social Security Number (SSN) to several suppliers. By doing that, she guaranteed that she would pay the bills if her company could not.
It is now eight months since her business failed. She has not been able to return to her previous career as a marketing executive and has managed to keep a roof over her head by working multiple minimum wage jobs. If all of that isn’t enough, the wholesale accounts she guaranteed plus other business creditors have reported her business debts to her personal credit history. Now her personal credit scores have dropped from excellent to poor. With the economy in such dire straits, the likelihood of her finding a marketing position in the near term is slim. And it makes no sense to think she can pay off more than $300,000 in business debt. Her only option is to declare bankruptcy.
The wise course of action would have been to seek out the advice of a bankruptcy attorney, with many years of experience working with very small business bankruptcies, at the time she realized she had to liquidate her company. It is likely that a skilled attorney would have been able to prevent the business debts from destroying her personal credit.
The lessons from Annie’s difficult dilemma:
Keep business credit separate from personal credit.
When you know your business is in trouble, ask for professional advice early.
Take action to protect your financial future.
Many businesses will seek to reorganize rather than liquidate assets. In other words, you want to stay in business, but income has diminished substantially and you need more time than usual to pay your debts. It’s a bigger problem than simply negotiating with a few friendly creditors. You need the help of Chapter 11 bankruptcy. There are 94 federal judicial districts in the
Your business presents the court with a petition for bankruptcy, which must be prepared by an attorney. This is followed by a court-filed plan that defines how your business will reorganize so it can regain financial health over time. Chapter 11 for businesses is similar to a Chapter 13 personal bankruptcy. One notable difference: Courts seem to understand the flexible operating expense requirements of businesses, while there is a tendency to not allow for unexpected monthly expenses of individuals.
Chapter 11 bankruptcy is an excellent process available to businesses with prospects of long-term sustainability after you recover from a temporary revenue slump. If your established company has been successful and you can see your way to financial recovery on the other side of this exhausted economy, contact a talented local bankruptcy attorney to discuss whether this option is appropriate for you. For many businesses, Chapter 11 provides the breathing room necessary to re-start and energize a formerly profitable enterprise.
Next week I will address how to select a bankruptcy attorney and rebuilding your credit life after bankruptcy.