Small business drowning in debt

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Dear Bankruptcy Adviser,
I am a small-business owner and have been in business for 10 years under an LLC. For the last two years, due to the economy, I have found myself upside down in debt. I have been trying to sell the business for the last eight months to no avail. I am not able to meet my debt obligations and need to know the steps to take for declaring bankruptcy — or any other suggestions you may have. How do I go about finding out what is tied to me personally and the best course of action to take?
— Richard

Dear Richard,
It appears only bankruptcy attorneys are protected from this recession. I have seen every type of person file bankruptcy — wage earners and small-business owners. Almost everyone is vulnerable.

You will have a few major issues to consider prior to filing for personal bankruptcy. When you file bankruptcy, your business is an asset as well as a liability. The trustee, who is the person assigned to a bankruptcy case, will look at your business income, assets and receivables to determine whether an asset exists. If one does, you could lose the business or some valuable business asset.

Does your business have any value?

Many small businesses are based on the efforts and relationships the owner has established over the years. Clients are only interested in working with the owner and no one else.

The business value will be determined by an inventory of product, potential account receivables, employment contracts with particular companies and type of business and business assets/equipment. These are some of the factors that will go into the trustee’s analysis of whether any value can be attributed to the business. If the trustee determines the business has little or no value, you can qualify for personal bankruptcy and protect the business.

I have told clients to put the business up for sale for 30 to 60 days prior to filing bankruptcy. That is one sure way to see whether your business has any assets with a market value.

For example, insurance agents or brokers could have very little monthly income, but also could have policies that will be renewed into the future. Those policy renewals are assets of the business.

A real estate agent or broker could have loans in escrow at the time of filing. Those future commissions will be considered assets that may or may not be protected.

An actor or screenwriter could have past shows from which he or she is receiving residuals. A residual is a payment made to the creator of performance art (or the performer in the work) for subsequent showings or screenings of the (usually filmed) work. A typical use is in the payment of residuals for television reruns. Those residuals will also be considered income.

Is the business incorporated?

In some bankruptcy court districts, the trustee demands that the business cease operations once the owner files for personal bankruptcy protection. However, that is only the case when the business is not incorporated. You will need to know whether the trustees in your particular area require the business to be incorporated prior to filing.

Some trustees are very aggressive regarding this issue. You could have the trustee demand that you cease all operations and shut down your business soon after your case has been filed. A competent and experienced bankruptcy attorney in your area should know the area trustees.

These are a couple of big, initial issues to consider prior to filing bankruptcy. You can file personal bankruptcy and keep operating a business, but you have additional work to do prior to making that final decision.

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