Considering Business Bankruptcy? Here’s What Not to Do

Just like individuals, businesses can fall on hard financial times. If this has happened to your business, you may be considering bankruptcy as a way to either eliminate or restructure debt so you can save your business. But if bankruptcy is a possibility, there are a number of mistakes that you need to avoid. Even if they are made with the best of intentions, they can cause complications or even penalties throughout the bankruptcy process. Read on to learn from your Southfield corporate bankruptcy team about how to avoid the most common pitfalls we have watched others fall prey to.

Mistake #1 – Paying Yourself First

Some people make the mistake of issuing themselves a “bonus” payment, or even paying themselves back pay that they are owed from the business before they begin the bankruptcy process. While this may seem like a good way to ensure you get your money now, it will likely cause problems down the road. As far as the bankruptcy courts are concerned, any money the business owes you is looked at just like any other debts on the books. You are not allowed to give yourself preferential treatment over other creditors by paying yourself prior to entering bankruptcy.

Mistake #2 – Borrowing from Friends & Family

Another mistake that is often made is a business owner will borrow money from a friend, family member, or even their own personal accounts to try to save the business. The problem is, if it doesn’t have the desired effect, that money could be lost. If you end up having to go through bankruptcy anyway, that loan could be discharged, meaning the person who lent it to you won’t get it back. This, of course, can have very negative consequences on your personal relationship.

Mistake #3 – Rack up New Debt

If you know that bankruptcy is on the horizon, you may be tempted to go out on a purchasing spree, knowing you won’t have to pay the money back after the bankruptcy is discharged. Some people do this with luxury items such as vacations, cars, or even homes. Others will make major purchases for their businesses. Regardless of what it is used for, the courts will look closely at all major purchases for at least three months prior to the filing. If they determine that you were intentionally trying to defraud the creditor, the debt won’t be discharged.

 Mistake #4 – Make Payments to Certain Creditors

One last mistake people in this situation make is sending payments to specific creditors before filing for bankruptcy. For example, you may want to pay off a debt with a business you hope to continue working with after the bankruptcy. This practice, however, is known as making preference payments to creditors and it is not allowed. The trustee assigned may actually “recapture” or take back the payments that were made for up to a year prior to filing for bankruptcy.

If you are thinking about having your business file for bankruptcy, the first thing you want to do is speak with an experienced bankruptcy attorney. We can help you to make the best decisions possible to help minimize any long term impact to you personally and to your business. Give us a call today and speak to a Southfield corporate bankruptcy attorney today!