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Drowning in Business Debt and Considering Bankruptcy

Opening a new business is one of the most exciting times of anyone’s life. The initial stages are full of questions you’re excited to answer and decisions you can’t wait to make. For some, this excitement continues as the business grows and the opportunity to succeed becomes more solid with every new day. For others, the questions get more difficult and those decisions they used to wake up in the morning so excited to make start to get postponed and pushed off because the choices all seem horrible. For a few, the biggest questions and the decisions with the most lasting effect on both their professional and personal life come when they are attempting to figure out how to get out from underneath all the business debt that is left when the decisions all seem to point to closing the doors of their company for good.

If you’ve been in business for a number of years, but you find that the profits you make never came near what was projected, it is likely that you don’t only need to close the business, but you’ll also need to deal with business debt at the same time. Many attempt to alleviate the weight of the debt by selling company owned equipment and using the proceeds to pay down their balances. If doing so doesn’t alleviate the debt, business owners will have a new decision to make: should they file for bankruptcy or try to cover the deficit with personal funds?

When attempting to decide whether or not to file for bankruptcy, the answer is almost always the same. Only file for bankruptcy if it is absolutely necessary. In the best-case scenario, you will be able to figure out a way to close the company and cover the company debt without the bankruptcy filing. Some look at bankruptcy at this point and see it as a smooth sailing version of shutting down the business. Anyone who has filed for bankruptcy or who is experienced in the industry will advise you, this is not an accurate description of the process.

Value Your Assets: When determining if filing bankruptcy is a necessity in your particular case, start by going through the company assets and determining actual value. Feel out the market for any equipment that can be sold. Don’t depend on the book value – particularly if you are in a specialty industry and others in the industry who might be interested in the products you have to liquidate probably know you need the cash. Before you count your bills from the sale of company owned products, equipment, property, etc. find the buyer and determine the price you’ll be able to get. The value of any item for sale can be far less than it’s technical “worth” depending on how badly and quickly you need to sell it, who is willing to buy it, the state of your industry as a whole, etc. Used equipment sold in economic distress will usually sell for less than its actual value.

Determine Personal Guarantee: Next find out if you have personally guaranteed the business’s debt. Check with each creditor; pull your original contractual agreements, etc. In some cases, creditors extend loans to your LLC or Incorporation, but in others they actually extended the credit to you personally. This is an extremely important distinction to determine. If you did NOT personally guarantee the debt, the creditor cannot legally go after you personally for the debt. They’ll only have the right to go after the business. If the business operations cease, the lender cannot collect from you personally simply as a backup. You were not listed as a guarantee of the funds.

If you can’t find your original paperwork and you don’t remember how you set up the credit used for your company, I recommend that you keep things simple. Just call the lender. Enter your information (social security number) into their automated system and see if it pulls up your account. If your personal social security number pulls up the account, that generally means that you personally guaranteed the debt. If your social security number is not on file, the lender probably extended the credit using your business tax identification number. This is the simplest and quickest way to determine liability for the debt if you aren’t sure.

Once you have this information, you can make an educated decision regarding the benefits and the need for a bankruptcy filing. If you need to discuss the potential benefit of filing bankruptcy in response to a failing business, please get in touch as soon as possible with one of the experienced southern California bankruptcy attorneys at Westgate Law.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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