Owning a business while filing a personal bankruptcy in New York can complicate the process, and if the business is bankrupt—as is often the case—it’s even harder. If your business is on the verge of bankruptcy, and especially if you’re a sole proprietor, there are some ways to better protect your business income from liquidation by the Trustee.
First of all, as far as the bankruptcy Trustee is concerned, your accounts receivable (money owed to your business) are assets, so the Trustee will take those and distribute them to your bankruptcy creditors. This is not a difficult process for the Trustee, which is why he or she will target them before any other business assets. The Trustee merely needs to serve a demand letter on the business’s customers that orders them to pay the bankruptcy estate instead of the corporation. Remember also that the Trustee is paid on a commission, and the accounts receivable are the low-hanging fruit of your business’s assets.
Another type of business the Trustee will try to monetize is work that you haven’t completed but haven’t billed to clients nonetheless. This isn’t as easy for the Trustee as accounts receivables because the amount the bankruptcy estate can take in depends on how far along the projects are. It’ll be easier for the Trustee to quantify the work’s value if yours is an installment contract in which payment occurs after certain conditions are met.
If filing in Chapter 7, proprietors should be very careful and ensure their bankruptcy attorney is experienced in business matters because the Trustee will look to see if you are using the business to gain a personal advantage. For example, the Trustee can collect loans from the business to the owner as money owed to the business, and payments to the business’ owner or relatives for the last year are recoverable as preferential transfers. The Trustee will further look out for personal expenses paid by the business, which he or she can recover as fraudulent conveyances.
Here are a few things owners of businesses bankruptcy might want to consider. First, list all your clients whose projects haven’t been completed on your bankruptcy petition. Next, contact your clients and inform them the business is bankrupt. Yes, this won’t be a pleasant discussion since they might be your creditors too, but with a little diplomacy on your part, they’ll hopefully understand and not take their business elsewhere. It may help to tell them that if you defaulted on your loans instead of filing bankruptcy, their projects would likely never be finished as the bank would’ve repossessed your business’s assets. Additionally, some of your business assets may be protected by exemptions, such as computer equipment used in a home office.
At this point, you may wish to do two things. First, before filing consider redirecting your business’s accounts receivables towards paying for whatever fixed expenses you can. Second, consider taking time off of work. Small business owners’ incomes usually come from their own labor, so if you continue working, that gives the Trustee more assets to work with. If your clients can wait, then try to delay or reschedule their projects so you can enjoy the full benefits after bankruptcy.
Small businesses magnify the difficulties of filing a New York consumer bankruptcy, so it’s important to hire an experienced attorney to help you through the process.
For more questions about small businesses, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Bankruptcy Lawyer Brooklyn Bruce Weiner for a free initial consultation.
