When business isn’t going well, it’s hard to know whether to keep struggling or throw in the towel.
Let’s look at some critical facts that may limit the net benefits a business can realize in bankruptcy.
How much of the business debt is secured?
The division of debt between secured and unsecured guides what reorganization can do for the business. Liens are generally unavoidable in bankruptcy, unless involuntary and recently perfected.
So, if a lender or vendor to the business has a blanket lien on the assets of the business, bankruptcy may limit the changes that can be made to the business debt or operation.
Liens that are larger than the value of the collateral may be crammed down. That is, in a reorganization bankruptcy, the secured creditor is only paid the value of the collateral.
Hidden traps in proceeds from collateral
Misuse of the the proceeds of a secured creditor’s collateral can create a non dischargeable debt for the individuals involved. The accounting for secured proceeds is critical.
2. Does the business owe back payroll taxes?
When an employer deducts taxes and social security contributions from employee wages, the employer becomes a fiduciary for that money which belongs to the employee.
“Loaning” the business the money due Uncle Sam from employees’ paychecks makes the responsible corporate officers personally liable for the trust fund taxes not paid to the taxing authority.
If diddling with the payroll taxes is what keeps the business afloat, you’ve got trouble.
Sales taxes are trust fund taxes in some jurisdictions, as well.
3. Has the business paid debts owed to insiders in past year?
Repayments to relatives and business decision-makers on their claims against a business entity can be recovered by the bankruptcy trustee under certain circumstances as preferences.
Filing bankruptcy for a corporation or LLC may just invite the bankruptcy trustee to sue the business owners and their families to recover money for creditors.
Image courtesy of fish2000.