Should I Close My Failing Business Before or After Filing Bankruptcy?

Unfortunately, one of the main reasons for filing bankruptcy is a failing business. I often meet with clients that are business owners that know that their business is failing, but have yet to close the business.

There are usually many questions surrounding when to close a business. Here are some general tips on the best timing for closing a business and filing for bankruptcy.

When is the best time to close the business?

The answer to this question is a difficult one, because it is often a complicated fact-specific answer. In general, Closing a failing business before filing bankruptcy is generally advisable. This simplifies the bankruptcy process by eliminating the need to value a running business and allows for easier liquidation of assets. Additionally, it can help protect personal finances and mitigate potential legal issues.

However, the best way to know is to meet with an experienced bankruptcy attorney at LifeBack Law for a free consultation to help navigate the issue. The below information is intended to be general information I often use with most of my clients’ fact scenarios, but not a substitute for the benefits of a free consultation with one of our lawyers.

Short Answer: Your business should be closed when you are ready to close it.

Long Answer: It is a really emotional experience closing a business. Small-business owners in Minnesota sacrifice a lot financially, emotionally, and physically in running their businesses. You may have invested a lot of your own money into the business or taken out a lot of debt for the business. You may have put your heart and soul into your product or service and it breaks you to imagine having to close the doors.

You may have worked long, physical hours at your business trying to make ends meet. This creates a lot of emotional baggage in owning a business, making the idea of closing the doors really difficult. That is why I often start by telling my Eden Prairie, MN, clients that the best time to close their business is when they are ready to close it.

More often than not, it is better to close the business prior to filing bankruptcy than after filing bankruptcy. That is because your ownership interest in your business is an asset that needs to be disclosed in your bankruptcy. It is usually easier to value a closed business in your bankruptcy schedules than an open business.

That is because we list it as the net value of the business's assets minus its debts. Usually, the debts exceed the assets and the business is valued at $0. Even if a business may have some money in the bank and equipment still in its possession, it will be valued at $0 if the business’s debts exceed the value of the assets. Additionally, if you have provided a personal guarantee for any business loans, closing the business before filing can help manage the impact of these guarantees.

If a business is still operating, you can still file bankruptcy before you close the business. Please be aware, that as soon as you file for bankruptcy, any creditors of yours and the business will learn that you filed. If you owe back rent to a commercial landlord, the bankruptcy filing may motivate them to close the doors before you get everything you need out of the space.

If you owe a vendor and are continuing to operate, that vendor may stop selling you a necessary product before you are ready to close the doors. If your business relies on credit cards to pay for certain monthly expenses, the credit cards may close from the bankruptcy filing before you are ready for them to close. For these reasons and others to be discussed with an experienced bankruptcy attorney, it is often easiest to close the business pre-filing.

Business owners can also be personally liable for business debts, especially if they have signed personal guarantees or if they are sole proprietors. This personal liability can have significant implications during bankruptcy proceedings.

Practical Considerations for Closing Your Business Before Business Debts and Bankruptcy

The decision to close a business is never easy, but in some cases, it’s the most responsible and practical choice. Before filing for bankruptcy, take these steps to ensure a smoother transition:

1. Settle Outstanding Debts: If possible, try to negotiate with creditors to settle outstanding debts or establish payment plans. This can help reduce your financial burden and potentially improve your credit score.

2. Liquidate Assets: Consider selling business assets like inventory, equipment, or real estate to generate cash. This can help cover outstanding debts or provide you with funds to start anew.

3. Cancel Licenses and Permits: Notify relevant government agencies and cancel any business licenses, permits, or registrations you hold.

4. Inform Employees and Customers: Give your employees adequate notice of the closure and communicate with your customers about the situation, including any ongoing warranties or services.

5. Comply with Employment and Labor Laws: Ensure compliance with employment and labor laws when closing your business. This includes providing notice for mass layoffs, making proper employee payments, and seeking professional assistance or resources from government agencies to ensure all regulations are met.

6. File Final Tax Returns and Resolve Financial Obligations: Ensure you file all necessary tax returns for the business, including sales tax, payroll tax, and income tax returns. Additionally, resolve financial obligations by paying off creditors and meeting tax requirements to avoid future financial costs.

Chapter 7 Bankruptcy for Business Owners: What to Expect

If you choose to file Chapter 7 bankruptcy as a business owner, your non-exempt business assets will be liquidated to repay creditors, addressing your business debt. Additionally, Chapter 7 bankruptcy can help erase personal debt, relieving both business and personal financial obligations. Here’s what you can expect:

1. Trustee Appointment: A bankruptcy trustee will be appointed to oversee your case and liquidate your assets.

2. Asset Liquidation: The trustee will sell any non-exempt business assets, such as inventory, equipment, or real estate.

3. Debt Discharge: After liquidation, most of your dischargeable debts will be wiped out, giving you a fresh start.

Chapter 13 Bankruptcy for Business Owners: An Alternative Path

Many business owners consider personal bankruptcy to manage their debts while keeping their businesses operational. Chapter 13 bankruptcy might be a viable option for business owners who want to keep their businesses running while repaying debts over time. Here’s how it works:

1. Repayment Plan: You’ll propose a repayment plan to the court, detailing how you’ll repay your creditors over three to five years.

2. Continued Operations: You can continue operating your business while making payments according to your plan.

3. Debt Discharge: After successfully completing your repayment plan, your remaining dischargeable debts will be eliminated.

Factors to Consider When Deciding to Close Your Business

Before making the difficult decision to close your business, it’s crucial to weigh several factors:

• Financial Viability: Analyze your business’s financial health, including cash flow, revenue, expenses, and debt. If your business is consistently losing money and has no realistic prospects for recovery, closure might be the most practical option.

• Personal Liability: Consider your personal liability for business debts. If you’ve personally guaranteed loans or have significant personal assets at stake, closing the business before bankruptcy could help protect your personal finances. Additionally, personal debts can impact your ability to negotiate with creditors and may influence your decision to close the business. Personal liability for business debts can significantly affect your overall financial situation, potentially leading to personal bankruptcy filings.

• Emotional Toll: Owning a failing business can be emotionally draining. If the stress and anxiety are negatively impacting your well-being, closing the business could be a necessary step for your mental health.

• Alternative Options: Explore alternatives to closure, such as restructuring your business, seeking additional funding, or negotiating with creditors. Sometimes, with the right adjustments, a failing business can be turned around.

The Bankruptcy Process for Business Owners: A Step-by-Step Guide with a Bankruptcy Trustee

Filing for bankruptcy as a business owner involves several key steps:

1. Consult with an Attorney: Seek guidance from an experienced bankruptcy attorney who specializes in business bankruptcies. They can help you understand your options, prepare the necessary paperwork, and represent you in court.

2. Consult the Small Business Administration (SBA): The SBA provides resources and guidance for business owners filing for bankruptcy, including steps for filing dissolution documents, canceling registrations, complying with employment and labor laws, resolving financial obligations, and meeting tax requirements.

3. Choose the Right Chapter: Decide whether Chapter 7 or Chapter 13 bankruptcy is the most suitable option for your situation.

4. Gather Financial Documents: Collect all relevant financial documents, such as income statements, balance sheets, tax returns, and debt schedules.

5. File the Petition: File your bankruptcy petition with the bankruptcy court. This triggers an automatic stay, which halts creditor actions against you and your business.

6. Attend the Meeting of Creditors: Participate in the 341 meeting of creditors, where the trustee and creditors can ask questions about your finances.

7. Complete the Bankruptcy Process: Depending on the type of bankruptcy you file, you’ll either complete a repayment plan (Chapter 13) or undergo asset liquidation (Chapter 7).

8. Receive a Discharge: Once you’ve fulfilled the requirements of your bankruptcy, the court will issue a discharge order, relieving you of most of your debts.

Common Mistakes to Avoid When Closing a Failing Small Business

Closing a business can be a complex process, and it’s essential to avoid common pitfalls:

• Ignoring Legal Obligations: Failing to fulfill legal obligations, such as paying employees, filing tax returns, or notifying creditors, can lead to legal problems and financial penalties. It is crucial to pay creditors, including addressing unpaid salaries, employment taxes, and sales taxes, to avoid further complications.

• Rushing the Process: Take the time to carefully consider your options and plan for a smooth transition. Rushing the closure can result in missed opportunities or unnecessary complications.

• Neglecting Employee Needs: Communicate openly with your employees and provide them with as much support as possible during the closure process.

• Overlooking Tax Implications: Closing a business can have tax consequences, so consult with a tax professional to ensure compliance and minimize your tax liability.

Moving Forward After Business Closure

Closing a business can be a difficult experience, but it doesn’t have to be the end of your entrepreneurial journey. Use the experience as a learning opportunity and consider these steps for moving forward:

• Reflect on the Experience: Analyze what went wrong and identify any lessons you can learn from the closure. Sole proprietors, in particular, can gain valuable insights into managing personal and business finances more effectively.

• Explore New Opportunities: Consider starting a new business venture, pursuing a different career path, or focusing on personal growth and development.

• Seek Support: Don’t hesitate to reach out to friends, family, or professional counselors for emotional support during this challenging time.

• Embrace a Fresh Start: Remember, bankruptcy can provide a fresh start for individuals and businesses alike. Use this opportunity to rebuild your financial future and pursue new goals.

By following these tips and seeking professional guidance, you can navigate the complexities of business closure and bankruptcy with confidence, ultimately emerging stronger and more resilient.

Making the Right Decision for Your Future

Whether to close your business before or after filing bankruptcy is a personal decision that depends on your unique circumstances, but it is crucial to resolve financial obligations to avoid future financial costs. Considering personal bankruptcy can help business owners manage their debts and keep their business open.

Consulting with an experienced bankruptcy attorney can help you weigh the pros and cons and make the best choice for your financial future.

CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW

LifeBack Law's experienced bankruptcy attorneys know how to help Minnesota business owners navigate the process of closing their businesses. If you are looking to close a business and file a Chapter 7 or Chapter 13 bankruptcy, reach out to Minnesota's nicest bankruptcy law firm by going now to www.lifebacklaw.com. You will be thankful you did.