June 09, 2017 Credit Building and Repair

As a small business owner, you know the importance of maintaining good business and personal credit. A strong credit score can help you fund big business purchases, open the door to increased small business funding, and obtain favorable rates on small business loans.

But what if your small business finds itself downing in debt?  If your small business is in severe financial distress, then bankruptcy may allow your business a way to recover from the burden of taking on too much debt. While filing for bankruptcy is not ideal, the good news is that you and your business can recover from bankruptcy, although it will take time and effort.

Take heart that you’re not alone in facing financial struggles with your business. Running a profitable business can be tough, and even the biggest names in retail aren’t immune from financial challenges. In fact, according to financial and business experts, the past two years have seen multiple big-name bankruptcies.

The bottom line is this: Your small business can — and will — recover from your bankruptcy. So let’s take a look at the types of bankruptcy you may face and how you can come out stronger on the other side.

Small Business Bankruptcy Options: Chapters 7, 11 & 13

Bankruptcy is a process by which you reorganize and, in some cases, wipe out your debts. There are 3 main types: chapter 7, chapter 11, and chapter 13. Under chapter 7 (“liquidation”), you’ll divide your assets into exempt and non-exempt categories. The exemptions vary by state, so you’ll need to talk to an attorney about what property may be exempt from bankruptcy in your case. You get to keep the exempt property and the non-exempt property is sold; that money is used to pay off your creditors. Whatever debt isn’t paid off gets discharged (wiped out). Any individual or business can use chapter 7.

Under chapter 13, you’ll work with the court to come up with a payment plan for your debts based on your income. Those plans typically last 5 years and at the end, your remaining unsecured debt is discharged. Only individuals and sole proprietorships can file under chapter 13.

Chapter 11 bankruptcy is exclusively available to businesses other than sole proprietorships and involves restructuring the company and the debt while allowing the business to continue to operate through the process. Chapter 11 can be very time consuming and expensive, so it’s not always a good option for small business owners. It may make more sense to file under chapter 7.

State and federal laws limit who can file each kind of bankruptcy, so you’ll need to work with an attorney to determine which is right for you.

After the Bankruptcy

Bankruptcy is a major financial event for an individual or business. The immediate aftermath depends on the type of bankruptcy. Chapter 7 can take as little as a few months and afterward, the unsecured debt is wiped out (you’ll still have to manage your mortgage and other secured debt if you choose to keep making those payments). The only thing left to do is work on rebuilding your credit score.

For chapter 13, you’ll spend a few months working out the payment plan and getting all the creditors to agree. Then you just have to keep making your payments for the next 5 years, after which whatever unsecured debt is left will be wiped out. If you miss payments, you’ll end up back in bankruptcy court and may have to file under chapter 7.

Chapter 11 is somewhat similar to chapter 13, but more complex because it deals with business assets. When you file, you’ll need to provide a comprehensive plan for how you’re going to reorganize and pay your creditors back over time. A chapter 11 plan may involve shutting down unprofitable locations, laying off extra staff, downsizing your space, and making other moves to increase your cash flow.

Bouncing Back from Bankruptcy

You probably know that a bankruptcy has a serious impact on your credit score and it will remain on your credit report for years. However, it doesn’t mean your credit is destroyed forever. Just look at these huge corporations who were able to bounce back after bankruptcy. - it may take time, planning, and effort, but you can get there.

Step One: Make a Concrete Financial Plan

Just as you started with a business plan and business model to get your fledgling business off the ground, so should you create a post-bankruptcy plan. Bankruptcy is going to require you to take stock of your current assets, debts, business property, and accounts receivable. Use this information to formulate a workable plan for the future. This applies whether you’re dealing with a business bankruptcy or a personal bankruptcy – start by making a plan.

Step Two: Get Your Credit in Order

The harsh reality is your credit is going to take a hit when you file bankruptcy. It’s now your job to monitor your credit and keep tabs on how it’s on the upswing.

Make it a priority to get your credit score for each of the three major personal credit bureaus; Equifax, Experian, and TransUnion. The Fair Credit Reporting Act states that a bankruptcy can stay on your credit report for up to ten years (though some report that they disappear after seven years). Note: You may be impacted personally in certain legal business structures, since you may be personally liable for the business debt.

Once you’ve obtained your credit reports, you should make sure that they are all correct. You should continue to monitor your reports for accuracy while you rebuild. Once you start to make payments on time, then your credit score will start to improve.

Step Three: Finding Vendors and Business Contacts

One real concern than many small business owners have is how they will find vendors and business contacts willing to work with them after a bankruptcy filing. It may be challenging to secure bank loans during the first period after bankruptcy, but working with your tried and true business suppliers may still be possible. Note that most small businesses file under chapter 7 because chapter 11 is too time-consuming and expensive, so you may be starting over with very little by way of business assets. That’s ok – you built it once and you can do it again. And this time you have the benefit of experience!

Small business experts advise that when you’re scoping out new vendors after a bankruptcy, you may have to provide additional assurance of repayment. This may be in the form of a money deposit or with set prepayment installments.

Ask any new vendors or former creditors to report all payments to Dun & Bradstreet. Dun & Bradstreet is the premiere business reporting bureau. Once your on-time payments are reflected consistently over time, then your business credit will begin to recover.

Step Four: Pay on Time

One key to rebounding from small business bankruptcy is simple: Pay on time, every time.

Right now, your on-time payments represent that you and your small business are working toward recovery from a perilous financial situation. Each vendor, lender, or bank has given you a second chance to show that you’re credit- and trust-worthy. Value that trust and set up a system so that each payment is timely and complete.

Small business experts recommend setting up a standardized, automated system for payments to help you stay on track. Automating not only takes the guesswork out of payment, it ensures that you keep paying down old debt or pay off new debt, each month and on time. Not only will this help you with human goodwill about the trust worthiness of your business, but timely payments will boost your recovering credit score.

Step Five: Look Toward the Future with Hope

There’s no sugar-coating it, dealing with bankruptcy is not a situation that any business owner wants to deal with. That said, as with any difficult situation, this too will pass. Recovering from bankruptcy isn’t the end. Some business professionals recommend that you look at it as a way to take stock and rebuild. It’s a second chance to fix problematic financial habits and reset yourself and your business on the right path to success.

Stick With It

Recovering from bankruptcy takes time and effort. Make no mistake – bankruptcy is a big deal. Before you decide to file, make sure you talk to your financial advisors and lenders to see if there are other options; many lenders are willing to work with borrowers because bankruptcy is also a huge hassle for them. If you do need to file a bankruptcy, the key to bouncing back is strict financial discipline. If you stay on top of timely payments, avoid taking on more debt outside of your comfort zone, and work with financial experts to develop new habits, then the challenges of the past can help you build a strong new financial future.

 

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