Facing business bankruptcy is daunting for most small business owners. Filing for bankruptcy is a challenging decision to make, filled with complexities and uncertainties. It’s important to arm yourself with the knowledge of how business bankruptcy can provide a lifeline to your business.
The question of how to prepare for business bankruptcy in Maryland then becomes critical.
This article provides some direction for struggling businesses that may benefit from bankruptcy. We will walk you through 7 steps that provide a roadmap on how to prepare for business bankruptcy in Maryland so that you can make an informed decision about the future of your business.
Table of Contents
Step 1: Acknowledge the Situation
When you’re considering business bankruptcy, the first step is to be honest with yourself about the reality that your business is struggling. If you’re unsure about the financial health of your small business, consider the following indicators:
- Insurmountable business debt. If your business has liabilities that outweigh its assets without a foreseeable path to overcome this challenge, it’s a clear indication that action needs to be taken.
- Collection activities and legal judgments. If lawsuits are being filed against your business–or worse–judgments have been entered, your business may be in immediate jeopardy.
- Inability to restructure outside of bankruptcy. If:
- 1) You’ve been unsuccessful in negotiating with your creditors;
- 2) Your business’s debt issues are paralyzing you from taking action; or
- 3) You haven’t been able to find other sources of revenue–it may be time to consider filing for business bankruptcy.
Assessing the Extent of the Problem
It’s crucial to differentiate between temporary cash-flow hiccups and deep-rooted financial issues. Consistent and widening losses over an extended period could indicate underlying issues that, if left unaddressed, could cause irreparable harm to your business.
Understanding the extent and severity of your business’s financial issues is crucial. By grasping the situation, you can make informed decisions on the best way forward—whether that’s addressing short-term cash flow challenges or considering bankruptcy.
Importance of Seeking Professional Advice Early and the Potential Consequences of Waiting
The ramifications of not addressing your business’s financial issues promptly can escalate over time. Delaying action can lead to:
- Spiraling business debt due to continually accruing default interest and penalties;
- Legal judgments and seizures of assets; and
- Sales or transfers of business assets that could have been saved or better utilized.
It is imperative to acknowledge these signs, assess the gravity of the situation, and act promptly. The earlier you act, the more advantageous options you may have through a bankruptcy filing.
Seeking professional advice early on can make a significant difference in the success of your bankruptcy case.
Step 2: Consult With and Retain a Business Bankruptcy Attorney
If you’ve decided that you wish to learn more about how a bankruptcy may be able to help your struggling business, retaining an experienced business bankruptcy lawyer is vital. With the guidance of a skilled attorney, you can:
- Craft strategies to shield your business from creditor actions early on in the process.
- Decide the best bankruptcy chapter for your situation, whether that’s Chapter 7 liquidation, reorganization under Chapter 11, or Chapter 13 for sole proprietorships. An early decision can help you gain insight into key decisions, such as whether to continue operations. It can also help ensure that pre-bankruptcy transfers and asset liquidation do not cause issues in your bankruptcy case.
- Significantly enhance the likelihood of a smooth bankruptcy filing.
An experienced attorney can offer unbiased advice with knowledge of the bankruptcy code to help ensure the success of your bankruptcy case. They can assist you in crafting a solution that aligns with your goals for your business.
Step 3: Review Financial Records
To navigate the complex arena of business bankruptcy, your attorney should become familiar with your business’s operations, debt obligations, revenue, monthly expenses, and overall financial situation.
Business Operations Insight
From the outset, you should provide your lawyer with a clear picture of how your small business runs, including an explanation of your business structure, primary sources of revenue, and typical expenses, both fixed and variable.
With this understanding, your lawyer will be in a better position to determine what additional documentation is necessary and explain whether a business bankruptcy aligns with your goals.
Clear and Accurate Financial Picture
Often, small businesses don’t prepare financial reports such as balance sheets and profit and loss statements. A business bankruptcy attorney can connect you with professionals who can prepare these reports. This can allow you to gain an understanding of your business’s financial situation and better assess if bankruptcy will allow you to restructure business debts.
This information should help you understand what drives your business. It will help you make informed business decisions instead of taking stabs in the dark.
Essential Financial Documents
After connecting with a professional and obtaining financial reports, you can now:
- Examine a balance sheet to obtain a snapshot of your business assets and liabilities;
- Have a clear understanding of what sources of revenue are profitable; and
- Understand what expenses can be reduced or eliminated.
It’s also important to have a detailed understanding of your business’s liabilities, which is necessary when considering both Chapter 7 and Chapter 11 bankruptcy. This understanding will allow your bankruptcy attorney to determine how certain debts can be restructured.
In a very basic sense, debt can be categorized into two general categories:
- Secured Debt: Debts backed by collateral, such as real property with a mortgage, equipment purchases secured by the equipment, or bank loans secured by business property. Defaulting on secured debt can place all of your business assets in jeopardy of being seized.
- Unsecured Debt: Financial obligations without collateral. which most often includes credit card debt, unsecured lines of credit, and certain kinds of taxes.
Understanding your business’s liabilities will allow you and your attorney to strategize about what debts can restructured and what chapter or bankruptcy to file.
Step 4: Gather Documents
The next step is to start gathering relevant documents for your attorney. Here are some of the documents you will need to gather:
- Payroll records;
- Profit and loss statements;
- Balance sheets;
- Tax returns;
- Loan agreements; and
- Bank statements.
If you don’t have these records, a business bankruptcy attorney can connect you with professionals who are experienced in preparing these documents. They can ensure that all financial records are up-to-date.
Step 5: Inventory and Value Assets
Next, take stock of your company or business entity’s assets.
Start by documenting every asset your business possesses. This includes tangible items like machinery, vehicles, and real estate–as well as intangible assets, such as trademarks, copyrights, and other forms of intellectual property.
Next, a bankruptcy attorney can help you properly value these assets based on the requirements of the Bankruptcy Code–which can provide a solid assessment of what a Chapter 7 liquidation or Chapter 11 reorganization would look like.
Step 6: Compile a List of Outstanding Debts and Creditors
Providing documentation for all outstanding business debts is another key step when considering how to prepare for business bankruptcy in Maryland.
Start by making a detailed list of all your company’s debts. For each debt, write down the total amount owed, any arrears on secured debt, the interest rate, and the creditor’s details. Additionally, ensure that you compile all of the relevant loan documents, such as notes, security agreements, loan agreements, deeds of trust, and personal guarantees.
This information will provide a clear picture of your company’s financial obligations and allow your attorney to strategize about the most effective way to manage or restructure these debts.
Step 7: Determine the Best Way to Communicate With Stakeholders
Before you proceed with the bankruptcy filing process, think about how you’ll break the news to key stakeholders, such as your employees, lenders, and customers. Your attorney can help you communicate your decision to file effectively with various parties, which can allow your business to maintain valuable and critical relationships.
Benefits of Filing Business Bankruptcy
Despite the emotional and operational challenges of deciding to file for business bankruptcy, there are clear benefits to filing. One considerable benefit of filing for bankruptcy is the “automatic stay.”
The moment bankruptcy is filed, the automatic stay is triggered, halting all creditor collection activity. For example, this stops creditors from continuing wage and bank garnishments, charging orders, and enforcing liens.
The automatic stay provides the breathing room your company needs so you can regroup, strategize, and chart a path forward without assets being forcibly taken from your business.
Additionally, for businesses that opt for Chapter 7 bankruptcy, the journey is often simpler. There’s no obligation to devise a repayment plan, allowing your business to undergo an orderly winddown under the supervision of the Bankruptcy Court.
Conversely, for a business exploring the Chapter 11 route, there’s a notable degree of flexibility. The Bankruptcy Code allows your business to create a repayment plan to restructure debt–an option that would otherwise be unavailable to your business outside of bankruptcy. These powerful tools can reorganize business debts that your business does and does not need to pay–and offer a fresh opportunity for business revival and success.
How an Experienced Business Bankruptcy Attorney Can Help
- Choosing the right chapter of bankruptcy: A business bankruptcy attorney can help you choose the right chapter of bankruptcy for your small business–whether that’s Chapter 7, Chapter 11, or Chapter 13 for a sole proprietorship–that best aligns with your goals;
- Navigating legal complexities: Bankruptcy law is intricate and has substantial administrative requirements. An experienced lawyer can help you understand all the nuances of the Bankruptcy Code, ensuring that all laws are followed correctly and that you are gaining full advantage of what the Bankruptcy Code allows;
- Preparing bankruptcy documentation: Accurately preparing the complicated bankruptcy documentation is critical, as bankruptcy is all about full disclosure to all related parties. An experienced lawyer will review the financial documentation that you provide and work with you to draft the necessary paperwork;
- Representing your business in court: Both Chapter 7 and Chapter 11 bankruptcy require court appearances at various stages of the case. Your attorney will represent and advocate for your business’s best interests in court;
- Negotiating with creditors: Your lawyer can negotiate with creditors on your behalf to potentially modify loan terms, reduce interest rates, or even eliminate some of your business debt.
Steiner Law Group is a Business Bankruptcy Firm That Can Help
Steiner Law Group is experienced in guiding people on how to prepare for business bankruptcy in Maryland.
We understand the overwhelming toll that bankruptcy can have on business owners, their customers, and their employees. We are dedicated to helping clients throughout Maryland during this difficult period.
Steiner Law Group has helped many Maryland residents discharge millions of dollars of debt and can help you get a fresh financial start.
Contact Steiner Law Group
If you are ready to take the next step toward financial freedom and file for bankruptcy for your business OR have more questions about how to prepare for business bankruptcy in Maryland, please schedule a consultation or call us at (410) 670-7060.