What is Business Bankruptcy and how can you fall for it?
With the exceptionally volatile economic climate across the globe business bankruptcy is increasing rapidly. The three types of business bankruptcy are the following- chapter-7, chapter-11 and chapter-13.
Let us briefly try to understand what exactly each one implies and how we can recover from the following.
File for this bankruptcy if your business and your personal income does not suffice to cover any portion of your debts. For this you will need to show that you do not have enough to pass a means test as well that is you do not have enough assets to repay your debt. However, many of your assets will be sold to initiate at least some payments to your creditors. This would not include your tools or machines of operation needed to keep the business running, but besides these most of your assets will be required to turn over which makes the liquidation of the business almost inevitable.
How to Bounce Back?
First and foremost remember that the bankruptcy court will discharge most of your debts. So it is a good thing even if some of your assets are lost in the process.
Secondly, if you do not want a particular asset to be turned over, consult your attorney on how you can do so, because there are alternatives to do so.
A chapter-7 bankruptcy is relatively simpler and usually lasts up to 140 days, unless it gets too tangled.
Now, chapter-7 and getting done with your debts may feel like a sigh of relief to you but remember this stays on your credit report for 10 years and so you need to start improving your credit-standing as soon as possible.
Employing these few steps can actually help you restore and build your credit score before the completion of those 10 years.
- Keep a copy of your bankruptcy discharge safely- it will help you to get credit post bankruptcy.
- Pick a credit card that helps you improve your credit score. Credit will be available to you now at very high interest rates. So make sure you just have one credit card that does not allow you to go overboard with debts. Obtaining a secured credit card is a good idea.
- Buy only the absolute necessities and do not, I emphasize do not indulge in luxuries with your credit card.
- The ultimate rule to rebuild your credit score - make your payments on time. This will give a good push to enhancing your credit score, so make sure you keep your payments manageable.
- Finally, do not fall in the vicious circle of quick-fixes and scams from companies that ask you to pay and say that they can wipe away your bankruptcy or enhance your credit score. Legitimately,legally they can't.
This is commonly referred to as the reorganization bankruptcy. It is a much longer drawn process than chapter-7. In chapter 13 a bankruptcy trustee guides you on a repayment plan where you get to pay many of your debts at a huge discount and the rest fully. It is the best option for people who are behind on mortgage payments and want to keep the home. It is also the best option if you have tax debt. Chapter-13 gives you the protection of the bankruptcy court for three to five years. A chapter-13 bankruptcy will remain a part of your credit report for 7 years.
A good option for sole-proprietors and partnership firms, chapter-13 bankruptcy can wipe out your business debts if your business is not a separate legal entity. Your business debts are not viewed separate from your personal debts and is consolidated into one repayment plan where at the end of the plan you can discharge any non-priority business debts.
Also it allows to continue with your business, and not sell of all your non-exempt assets while you reorganize your income and expenses graph to pay off the debts.
The biggest advantage of a chapter-13 bankruptcy is that it will help you reduce the balance of some secured debts to the value of the property thus reducing the loan burden and lowering your monthly payments. This is what is called a cramdown in chapter-13.
Taking Charge Post Chapter-13
A realistic functioning budget is your key to get back after a chapter-13 bankruptcy. Have a budget that prevents any unnecessary expenditure and debts and keeps aside an emergency fund or savings line for any contingencies.
Do not allow any of your payments to go overdue, as that will cause a serious damage to your credit rating, while paying on time will enable you to improve your credit score relatively fast. If the incomes aren't enough for a month, pull money away from some unnecessary category to the priority payments.
Also while setting the budget, remember that chapter-13 allows you to keep operating your business, but you have to pay your unsecured creditors money back equal to the value of nonexempt assets in you plan. So do not overestimate your financial holding.
Finally draw up a list of the mistakes you made in the past and ensure you do not repeat them again in your business. Moving forward after a bankruptcy is not that hard. Don't treat it like a guilt or shame.
Before moving any further one advice I would give to anyone filing for bankruptcy is to hire a good attorney who will secure your present and future in the best possible way. Bankruptcy is complicated and you will need a good lawyer, specialized in the field.
Next we come to the most expensive and intricate form of business bankruptcy.
Filed mainly by big business houses this, allows the debtor to restructure one's business and finances through a plan approved by the bankruptcy court. This reorganization plan helps the debtor to reduce and modify some of his payment clauses and facilitate business operation to earn profits. Selling of assets to make payments or downsize one's business is also permitted under chapter-11.
Genera Motors, United Airlines and the recent case of Kodak are all examples of chapter-11 bankruptcies.
Chapter-11 often becomes the forerunner to a successfully operating business again.
A cautionary note: A universal way of keeping check on credit scores for all, not just those who have filed for bankruptcy is to obtain a copy of one's credit report to know exactly where you stand and if your finances are being reported correctly or not.
Equifax, Experian and TransUnion are credit reporting agencies that provide you with a free report every year. So take advantage of that and ensure all your information is being reported accurately. Any discrepancies must be reported immediately.
In case of bankruptcies, it becomes all the more essential to know that all your pre-bankruptcy debts have been discharged or not in your credit score, or if some items still appear delinquent. If so get it corrected immediately.
Bankruptcies are never easy but a few positive changes here and there will gear you to a fresh new successful start sooner than you thought.