Getting through painful process requires composure, organization and advice.
By Thomas Gnau and Vince McKelvey
When bankruptcy appears to be your least bad option in a sea of bad options, what should you do? In plain English: Don’t panic. Get your records together. Talk to your attorney. How do you know you’re headed for bankruptcy?Unfortunately, that may be the easy part. “Most typically, when you’re headed in that direction, you’re having trouble paying your bills,” said Ronald Pretekin, attorney with Dayton law firm Coolidge Wall. You also may be tempted to divert federal and state withholding taxes to pay creditors, Pretekin said. If so, resist the temptation. Such diversions simply create bigger problems, he said. “Responsible officers can be held personally liable for dealing with those issues.”
One of the first questions Pretekin asks clients: Where do you stand on your taxes?
Matters get murkier — for nonspecialists, anyway — when it comes to the array of bankruptcy options.
Miami Twp. attorney Wayne Novick chairs the Dayton Bar Association Bankruptcy Committee. Business structure determines the kind of bankruptcy protection available, he said.
In general, businesses can shut their doors in Chapter 7 or attempt to continue operating and reorganize through Chapter 11. The law does not allow corporations to file Chapter 13.
An individual “doing business as” can file Chapter 7 (to shut the doors), Chapter 11 (to reorganize) or Chapter 13 — sometimes known as an option for “smaller guys,” Novick said. With Chapter 13, if a nonincorporated business can produce a suitable plan, a court can allow it to move forward with perhaps less oversight or influence from creditors.
Chapter 11 means holding off previous creditors while trying to attract or work with new ones, Novick said. That can be challenging, to say the least.
Indeed, often the path to bankruptcy becomes clear because creditors are clamoring for payment — or suing.
“In this environment, I think a lot of creditors will work with you for at least some period of time,” Pretekin said. “But there’s always a point where everybody runs out of patience.”
“One of the keys is, who is going to give them credit?” Novick said. “You have to work out something with the future suppliers (creditors), and that’s where the small business Chapter 11s run into difficulty.”
Novick — talking the language of attorneys who work with entrepreneurs — says it comes down to the “input of new capital.” How will payroll be met or supplies purchased?
Attorneys need to evaluate whether a business can go forward. Good business records help that decision. Even getting something as fundamental as a monthly “P&L” — a profit and loss statement — can be difficult for some small businesses.
Other questions that demand answers: How strong is the relationship with suppliers? Can they count on suppliers to continue that relationship? Can the business operate on cash? Are accounts receivable collectable? What’s the debt total?
Fear of confronting the issue won’t help, Novick says. Talk to your accountant and attorney sooner rather than later.
“There’s no harm in that,” Novick said. “But people fear that.”
Said Pretekin, “One of the earliest things to do is talk to your lawyer, your accountant.”
Pretekin and Springboro attorney Ira Thomsen emphasize the importance of considering not just the business’ position, but that of the individual or individuals who have guaranteed loans. The question becomes: Does seeking bankruptcyprotection make sense in this case?
“Do I really need to file a bankruptcy for this business if I’m going out of business?” Thomsen said.
If a business isn’t being sued by creditors, and if assets are not sufficient to pay off secured lenders, then attorneys may advise clients to close their doors and concentrate on protecting personal assets.
Assets usually are on the line when small businesses have one or two owners. Often those owners have personally guaranteed their business’ obligations, Thomsen said.
In that case, individual owners may consider filing personal bankruptcies, usually a Chapter 7 or 13, but not filing for their business.
Said Thomsen, “I have not run into a situation, a small business situation, where the debt is not guaranteed.”
If there are reasons to file for both personal and business situations, often different attorneys will be needed for each side, Thomsen said.
Contact this reporter at (937) 225-2390 or tgnau@DaytonDailyNews.com .
Source: GratefulLawyer.com
17 minutes ago
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