How Business Bankruptcies Works: Remember that your business is your assert.
According to the SBA, 60,837 businesses filed for bankruptcy in 2009.
Starting and running a successful business.
No matter how experienced or talented you are.
Will be one of the most difficult endeavors in your life.
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How Business Bankruptcies Works
Remember that no matter how far in debt you go, bankruptcy is always your choice.
You don’t have to file it unless you really think it’s time to start over.
If you do fall on hard times and bankruptcy appears as the best option,
follow these tips ensure you protect your assets to the maximum extent possible:
The assets that you have worked long and hard to accumulate can be lost within a very short period.
If they are not properly protected and you are sued.
How Business Bankruptcies Works
You file for bankruptcy or you are otherwise subject to judgments proceedings.
However, understanding that certain assets should be protected from being lost.
In such circumstances, lawmakers have passed acts under which certain types of assets are.
Or can be, shielded.
In this article, we’ll show you what measures you can take to protect your savings.
How Business Bankruptcies Works
Anyone With Assets is at Risk
You may think that only doctors, corporate executives and others in litigation-prone professions are the only ones who need to worry about protecting their assets.
Not so. There are many circumstances under which your assets can be attached or garnished.
These include if your file for bankruptcy.
You get a divorce or you are on the defensive end of a civil lawsuit.
Many of these circumstances are ones that most people don’t even consider until they occur.
For instance, if your teenage child is on the wrongful end of a motor vehicle accident.
That could result in the damaged party going after your assets.
How Business Bankruptcies Works
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1. Laws May Protect Your Assets
Federal and state laws determine what type of protection most of your assets have from creditors and judgments.
2. Traditional and Roth IRAs
Contributions and earnings in your Traditional IRAs and Roth IRAs have an inflation-adjusted protection cap of $1 million from bankruptcy proceedings.
The bankruptcy court has the discretion to increase this cap in the interest of justice.
In addition, amounts rolled over from qualified plans, 403(b) and 457(b) plans have unlimited protection.
However, bear in mind that this protection only applies to bankruptcy and not to other judgments awarded in other courts.
In such cases, state law must be consulted to determine whether any protection exists and the degree of such protection.
How Business Bankruptcies Works
3. Qualified Retirement Plans
Employer-sponsored plan assets have unlimited creditor protection from bankruptcy.
Regardless of whether the plan is subject to the Employee Retirement Income Security Act (ERISA).
This includes SEP IRAs, SIMPLE IRAs, defined-benefit, defined-contribution, 403(b), 457.
And governmental or church plans under code section 414.
4. Employee Retirement Income Security Act (ERISA).
ERISA plans are also protected in all other cases.
Except under a qualified domestic relations orders(where assets can be awarded to your former spouse or other alternate payees) and tax levies from the IRS.
For this purpose, a qualified plan is not considered an ERISA plan.
If it covers only the business owner (owner only plans).
Protection for owner-only plans is determined by state law. (For more on protection for your retirement plan assets, see Bankruptcy Protection For Your Accounts.)
How Business Bankruptcies Works
5. Homesteads
The amount of protection you have in your home varies widely from state to state.
Some states offer unlimited protection, others offer limited protection and a few provide no protection at all.
6. Annuities and Life Insurance
Like the protection of homesteads, state laws determine the level of protection that applies to annuities and life insurance.
Some protect the cash surrender values of life insurance policies and the proceeds of annuity contracts from attachment, garnishment or legal process in favor of creditors.
Others only protect the beneficiary’s interest to the extent reasonably necessary for support.
There are also states that do not provide protection at all. (To read more about life insurance, see Understand Your Insurance Contract, How Much Life Insurance Should You Carry? and Exploring Advanced Insurance Contract Fundamentals.)
To find your state’s asset protection laws, visit your state’s official website or the Asset Protection Book website.
How Business Bankruptcies Works
7. Asset Protection Trusts
For years, wealthy individuals have used offshore trusts in such locations as the Cook Islands and Nevis to protect assets from creditors.
But these trusts can be expensive to establish and maintain.
Now several states, including Alaska, Delaware, Rhode Island, Nevada and South Dakota, allow asset-protection trusts.
You don’t even have to be a resident of the state to buy into one.
Asset protection trusts offer a way to transfer a portion of your assets into a trust run by an independent trustee.
The trust’s assets will be out of the reach of most creditors, and you can receive occasional distributions. These trusts may even allow you to shield the assets for your children.
How Business Bankruptcies Works
The requirements for an asset protection trust include the following:
- It must be irrevocable.
- It must have an independent trustee that is an individual located in the state or is a bank and trust company licensed in that state.
- It must only allow distributions at the trustee’s discretion.
- It must have a spendthrift clause.
- Some or all of the trust’s assets must be located in the trust’s state.
- The trust’s documents and administration must be in the state.
If you are considering looking into an asset protection trust.
Be sure to work with an attorney who is experienced and proficient in this field.
Many individuals have run afoul of tax laws because their trusts did not satisfy regulatory requirements.
8.Accounts-Receivable Financing
If you own a business, you could borrow against its receivables and put the money into a non-business account.
This would make the debt-encumbered asset less attractive to your creditors.
And make otherwise reachable assets unreachable by creditors.
How Business Bankruptcies Works
9. Strip Out Your Equity
One option for protecting your assets is to pull the equity out of them and put that cash into assets your state protects.
For example, suppose you own an apartment building and are concerned about potential lawsuits.
If you took out a loan against the building’s equity.
You could place the funds in a protected asset, such as an annuity.
If annuities are sheltered from judgments in your state.
10. Family Limited Partnerships
Assets transferred into a family limited partnership (FLP) are exchanged for shares in the partnership.
Because the FLP owns the assets, they are protected from creditors under the Uniform Limited Partnership Act.
However, you control the FLP and, thus, the assets.
There is no market for the shares you receive.
So their value is significantly less than the value of the asset exchanged.
How Business Bankruptcies Works
11. Consult with a Lawyer
This is by far the best advice to take away from this post.
Ultimately, only a lawyer practicing in the jurisdiction where you do business can tell you exactly what you need to give yourself maximum protection.
However, you can take additional steps that generally work in all jurisdictions to keep your business protected.
12. Don’t Mix Business and Personal Assets
This doesn’t guarantee your business assets will remain safe from bankruptcy.
But, it does give you the best chance that at least your personal assets will remain safe from creditors.
13. Act Before You Receive a Judgment
If you receive a notice in the mail stating a creditor successfully levied a judgment against you, it’s too late.
At this point, the damage is done.
If you make any monetary transfers to protect your assets.
Courts could declare them to be fraudulent.
This means your creditors could take additional action against you.
How Business Bankruptcies Works
14. Act Quickly and Initiate Discussions
If you act first in bankruptcy and appear as though you are doing everything possible to repay your debts.
Your creditors are more likely to strike deals with you.
There’s no written rule or legislation guaranteeing this.
But it helps tip the odds in your favor.
15. Structure Your Business Properly (Hint: Avoid a Sole Proprietorship)
A sole proprietorship is your default business structure if you don’t report one to your state or the Federal government.
As an individual, you own all debts and assets of the business.
Which means your personal assets are at risk during bankruptcy.
A partnership, LLC, or corporation protects your personal assets in part from a business bankruptcy.
16. Convert Non-Protected Assets to Protected Ones Before You File
This has to be done in a very particular way, so if you’re considering bankruptcy.
Think about contacting a lawyer who can tell you exactly how to do this in your jurisdiction.
Where you put assets in order to protect them can differ markedly from state to state.
How Business Bankruptcies Works
17. Thinking Ahead is Key
Remember, by thinking ahead and acting before you actually file bankruptcy, you put yourself in the best position for protecting your assets.
Do this as far possible in advance and make sure you contact a lawyer as soon as possible.
18. Avoid Single-Source Dependence
“In business, single-source dependence is problematic.
Having one superhero employee is a problem.
Only having one internet connection could be problematic if it goes down.
In the same way, becoming dependent on one large client is unwise.
Have several large clients so you aren’t left reeling
19. Keep a Paper Trail
Keep notes and document everything in case you need to appear in bankruptcy court.
To go before the judge and make an appeal for payment.
It’s important to also consider how much work you want to continue doing for that client given the risk you may not be paid.
You will also want to create a plan that determines the rights to any work you have created but not been paid for
How Business Bankruptcies Works
20. Communicate Consistently and Assertively
I had a client go bankrupt one time.
But they were trying their best to pay off all of their vendors as a part of the bankruptcy.
However, they were not able to pay off every contract, so some were erased.
However, I got paid because I kept in communication with them consistently, had rapport, and was assertive without being too pushy.
Make yourself as visible as possible to them, or get left out.
21. Increase Your Marketing
Timing wise, it might seem like a strange time to increase your marketing spend without any guarantee of a future contract.
But if you were able to land one large client, you can certainly land more.
Take a chance and refocus on your marketing
How Business Bankruptcies Works
22. Adapt Payment Terms and Hold the Line
Bankruptcy is something that negatively impacts everyone.
But as a business owner you must ensure that your team isn’t at threat.
Work with the client and adjust your payment terms to a “pay up front” model.
Particularly if you’re in professional services.
This ensures that you’re servicing the needs of the client.
But also being responsible to the health of your own organization in the process.
23. Avoid Single-Source Dependence
“In business, single-source dependence is problematic. Having one superhero employee is a problem. Only having one internet connection could be problematic if it goes down. In the same way, becoming dependent on one large client is unwise. Have several large clients so you aren’t left reeling.”
24. Ask to Be Paid Before Work Begins
“The best practice that will keep your company proactive from clients going bankrupt? Always get paid before any work is completed. At my digital marketing firm, contracts demand payment on the first of the month before that month’s work begins. It’s the most optimal way to fully protect your business from not only bankrupt clients, but ones that run the risk of being fraudulent.
How Business Bankruptcies Works
25. Keep a Paper Trail
“Keep notes and document everything in case you need to appear in bankruptcy court to go before the judge and make an appeal for payment. It’s important to also consider how much work you want to continue doing for that client given the risk you may not be paid. You will also want to create a plan that determines the rights to any work you have created but not been paid for.
26. Be Proactive or Quit Before It’s Too Late
“You may have to be proactive when working with unstable businesses; it’s wise to ask for a deposit up front. If you sense that a company is challenged or paying bills too slowly, pause the work before the liability has piled too high.
How Business Bankruptcies Works
27. Start Negotiating Now
“Once your client goes into bankruptcy, their debt to you is probably going to be wiped out. Get in as early as possible and start chipping away at it. Ask for 30 percent payment now, and extend the rest. Or ask for 50 percent and say you’ll cancel the rest of the debt. Do everything you can, and be flexible, to extract as much cash as possible.
28. Communicate Consistently and Assertively
“I had a client go bankrupt one time, but they were trying their best to pay off all of their vendors as a part of the bankruptcy. However, they were not able to pay off every contract, so some were erased. However, I got paid because I kept in communication with them consistently, had rapport, and was assertive without being too pushy. Make yourself as visible as possible to them, or get left out.
29. Get Paid, Don’t Float Payments
“The specific actions you can take in every situation are different, but protecting your business should always be the top priority. To do that, you’ll want to tighten your payment terms as much as possible. Think you can get net 30? Try for net 15. And then you’ll need to be rigid on those terms. Stop everything if they miss an invoice. You don’t want to be holding the bag when the lights go out.
How Business Bankruptcies Works
30. Cut Your Losses and Diversify
“Once you see the possibility that your client will file for bankruptcy, it’s time to cut your loses and start searching for new clients to replace this one. Stop rendering services to minimize the debt, as it’s possible you will not get paid on services owed. Cut your losses and move towards the future. Of course, follow due diligence to recoup losses, but move on simultaneously
31. Increase Your Marketing
“Timing wise, it might seem like a strange time to increase your marketing spend without any guarantee of a future contract. But if you were able to land one large client, you can certainly land more. Take a chance and refocus on your marketing.
How Business Bankruptcies Works
32. Revoke Their Terms
“Immediately after learning about a client’s financial hardship, it is time to revoke their terms. If your customer is even considering filing for bankruptcy, their payables are the first place they will start cutting back. If your product is critical to their operations they will find a way to pay you in advance, and in your benefit, they won’t be able to get terms elsewhere.”
33. Get Assurances and Payments
“I would be proactive about my financial relationship with any large client. If you hear rumblings about a potential bankruptcy, try to front-load your next several payments or get a written assurance that they won’t default on any of the obligations the business has to you. Get some legal assistance and determine what the best course of action would be for several scenarios — get ahead of this!”
How Business Bankruptcies Works
34. Adapt Payment Terms and Hold the Line
“Bankruptcy is something that negatively impacts everyone, but as a business owner you must ensure that your team isn’t at threat. Work with the client and adjust your payment terms to a “pay up front” model, particularly if you’re in professional services. This ensures that you’re servicing the needs of the client, but also being responsible to the health of your own organization in the process.
35. Less Complex Ways to Protect Assets
There are some inexpensive, simple ways to protect assets that anyone can implement:
- You could transfer assets to your spouse‘s name. However, if you divorce, the end results could be different from what you intended.
- Put more money into your employer-sponsored retirement plan because it might have unlimited protection.
- Buy an umbrella policy that protects you from personal-injury claims above the standard coverage offered in your home and auto policies.
- Make the most of your state’s laws regarding homesteads, annuities and life insurance. For instance, paying down your mortgage could protect cash that is otherwise vulnerable.
- Don’t mix business assets with personal assets. That way, if your company runs into a problem, your personal assets might not be at risk and vice versa.
How Business Bankruptcies Works
Conclusion:
Filing a business bankruptcy lets the owners turn their business over to the trustee for an orderly liquidation. The business stops operating, and the court liquidates its assets and pays what it can to business creditors.
You may have seen self-proclaimed asset-protection experts advertise their seminars or easy–to–use kits on TV or the internet.
Perform extensive research, including checking with the Better Business Bureau before deciding to use any of these services.
And before you take any of the steps discussed in this article, meet with an attorney who is familiar with the laws of your state and an expert in the asset protection field.
Most importantly, don‘t wait until you have a judgment against you.
By then it may be too late, and the courts could declare that you made a “fraudulent transfer” to get out of meeting your obligations.