In last week’s article we discussed five basic strategies for business owners to deal with oppressive business debt. These include:
1) Negotiation with creditors;
2) Restructuring your company’s debt through Chapter 11 bankruptcy;
3) Liquidating your company through Chapter 7 Bankruptcy;
4) Voluntary dissolution; and
5) Simply walking away from the business;
In this week’s article, we will discuss the factors that you and your attorney should consider in deciding between these five strategies. Determining which strategy is best for your business will depend on your particular circumstances and goals. For the purposes of this discussion, we will assume that your business is a corporation or an LLC.
If you have a profitable business model except for a particular debt or group of debts, your first course of action should be to have your attorney contact your creditors and negotiate with them to reduce, defer, or restructure your debt in order to bring your monthly expenses low enough to allow your business to continue.
If some of your business’ creditors are unwilling to negotiate, you may be able to use a Chapter 11 bankruptcy to restructure your debt. In a Chapter 11 bankruptcy, your attorney will work with your major creditors draft a plan to restructure your business’ debt. Your creditors will then each vote “yes” or “no” to the implementation of this plan. One of the major benefits of Chapter 11 bankruptcy is that it is possible to have the court affirm the plan despite the dissent of certain creditors.
However, Chapter 11 bankruptcy is often prohibitively expensive.
If restructuring your debts is not possible, your goal should be to liquidate your business and start fresh without any personal liability. A corporation or LLC is properly dissolved by filing Articles of Dissolution with the Secretary of State, sending notice to all known creditors, liquidating assets, and properly distributing those assets to creditors and shareholders.
Unless your business has an extremely limited set of creditors and liabilities, it is rarely advisable to simply shut your doors and walk away without following proper dissolution procedure. If the dissolution process is handled improperly or ignored, the defunct business’ directors and shareholders can become personally liable for the business’ debts.
Often, when a company is dissolved, its principals wish to resume or continue the company’s business through a new debt-free corporation. Depending on your circumstances, a seamless transition from one corporation to the next without business interruption may be possible through voluntary dissolution and incorporation of a new company.
However, in order to ensure that none of your distressed company’s debts follow you to your new company, a Chapter 7 bankruptcy may be advisable. Creditors can apply your previous company’s debt to your new company if they can show that the new company is a mere continuation of the previous company, with the test being continuity of ownership. This means that if the shareholders of the second company are identical or nearly identical to those of the first, the first company’s debts may follow its shareholders to the second company. This problem can be solved through Chapter 7 bankruptcy.
Unlike a Chapter 11 bankruptcy, in a Chapter 7 bankruptcy, the bankrupt company does not survive the bankruptcy, but rather is liquidated to pay its creditors. At the conclusion of the bankruptcy, the company’s debts are discharged. This discharge allows the company’s shareholders to begin a new enterprise without worries about personal liability or the mere continuation rule.
If your business is distressed, it is important to meet with an attorney to help you assess the health of your business and the state of its debts in order to determine reasonable goals as well as the best strategy to achieve those goals with a view toward the survival of your business and the avoidance of personal liability.
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