If your business’ debts are threatening its continued operations, you should consult with your attorney about pursuing one of the following courses of action to either restructure your business’ debt or obtain a fresh start without incurring personal liability for your business debts:
- Negotiation with creditors: This is often the most efficient way to solve your business’ problems. If your business files for bankruptcy or dissolves, your business’ creditors face the risk of being left with nothing. They usually have incentive to negotiate a long-term payment plan that that will allow your business to survive. Often they will even agree to reduce the amount of your debt.
- Restructuring your company’s debt through Chapter 11 bankruptcy: In a Chapter 11 Bankruptcy, your business can work with your creditors to reorganize your debt and allow your business to continue to operate. Chapter 11 bankruptcies can be prohibitively expensive to many small business owners. However, they offer two important tools to debtors. First, during the pendency of the bankruptcy, creditors are not allowed to pursue their claims against your business. Second, reorganization plans can be confirmed by the court even if certain creditors vote against them. Although a Chapter 11 bankruptcy does require the debtor business to negotiate with its creditors, the debtor’s limited ability to cram down a plan over creditor objection and the automatic stay of creditor legal action can improve the debtor business’ negotiating position and force reluctant creditors to come to the table.gg
- Liquidating your company through Chapter 7 bankruptcy: In Chapter 7 Bankruptcy the business’ assets are liquidated by the trustee and distributed to the business’ creditors. The business ceases to exist and corporate debts are discharged.
- Voluntary dissolution: Voluntary dissolution is a process whereby the company itself, rather than a bankruptcy trustee, liquidates its assets and distributes them to creditors and shareholders in order of priority. If a corporation is not properly dissolved, its shareholders and directors can become personally liable for its debts.
- Simply walking away from the business: Closing your business’ doors without properly dissolving your corporation or LLC is only a good option for corporations with next to no liabilities or assets, as it will open up the business’ shareholders and directors to personal liability.
Your attorney will be able to assist you in determining which of these options is correct for your business, based on your business structure, the nature of its creditors and debt, and your goals. In the next part of this series, we will discuss the different considerations that will allow you and your attorney to effectively choose between these five strategies.