The last time you heard from me, I spoke about this:
No, not The Office episode where Michael Scott shouts his financial intentions to his employees (a classic, for sure). I talked about Chapter 11 bankruptcy as a possible fresh start when you’re facing heavy debt burdens in your Sarasota business, which could still have a viable future if said debts were alleviated.
But because bankruptcy is complex and not a catch-all for just anyone, I’m pulling out a part two today focused on the benefits and drawbacks of choosing this path, as well as some alternatives you could consider.
Let’s talk about the silver lining. Drowning in debt as a small business owner is a tough spot to be in. I won’t sugarcoat it. But filing for Chapter 11 bankruptcy can offer you a lifeline—a chance to regain control of your financial situation.
Here’s why it’s worth considering:
Automatic stay “shield.” Once you file, your creditors are legally prohibited from taking any collection actions against you, such as garnishing your wages or seizing your assets (with the exception of the IRS). This gives you a chance to catch your breath and develop a plan to repay your debts.
Debt negotiation opportunity. It gives you a golden opportunity to sit down at the bargaining table with your creditors and work out a deal that actually makes sense for you. Imagine having the power to reduce interest rates, extend repayment periods, and maybe even get some of that debt forgiven.
Protection from lawsuits. If you’re facing lawsuits from creditors, filing for Chapter 11 bankruptcy can stop the lawsuits and give you a chance to focus on rebuilding your Sarasota business.
Other benefits worth mentioning. You can also reject unprofitable agreements, sell assets to help pay your creditors back, streamline your balance sheet, and secure relationships with vendors with the hope of recovery.
Bankruptcy isn’t all rainbows and unicorns, obviously. While it does offer helpful advantages, it also has potential drawbacks that you should consider carefully.
It’s expensive. Filing for Chapter 11 bankruptcy isn’t free or cheap. You’ll pay attorney fees, court fees, and other costs associated with the process and those can really add up.
It bangs up your credit score: Filing for Chapter 11 bankruptcy will have a negative impact on your credit score. This can make it more difficult to obtain credit in the future.
It’s time-consuming and complex. Buckle up, because you’ll be heading into a labyrinth of legal complexities that will take TIME to sort out (several months or even years). You’ll have to submit detailed financial statements, develop a reorganization plan, and navigate through various legal requirements.
Not all debts are discharged. If you owe taxes to the IRS, bankruptcy may not be able to erase that debt. Non-dischargeable tax debts include recent income tax obligations (for the past 3 years), payroll taxes that were withheld from employees’ wages but not remitted to the government, and trust fund recovery penalties.
But there are other options available to Sarasota small business owners who are struggling with debt. Some of these options include:
- Debt restructuring for modified terms on your debts — a good option if you can reach an agreement with your creditors that you can afford to repay.
- Debt settlement to negotiate a reduced amount owed with your creditors (this can damage your credit score and may not be worth the risk).
- Debt consolidation where you combine multiple debts into one loan with a lower interest rate for more manageable payments (can be expensive).
Consult with a financial advisor or credit counselor who can help you assess your individual situation and recommend the best option for you.
Also, keep in mind that what I shared with you today by no means addresses all of the specific benefits and drawbacks of filing for Chapter 11 bankruptcy, nor does it cover all the details of seeking other kinds of tax debt relief.
Naturally, there are other factors to consider, such as the specific amount of debt you owe, your financial situation, and your individual circumstances. Make sure you sit down with a qualified financial specialist and/or bankruptcy attorney to get personalized advice on your specific situation.
However, what I can help you make a plan for are those tax debts. Grab a time on my calendar if you’re ready to have that conversation (the sooner the better):
On your team,