Filing for a personal bankruptcy is a difficult decision but going through a personal bankruptcy while exiting a business, adds its own extra dimension of challenges. If you’re considering bankruptcy and trying to exit a business, there are a few best practices you should follow.
When you’re filing for personal bankruptcy and either liquidating your business or exiting an LLC or partnership, you must openly communicate with your clients and the partners left to run the business. In the case of a sole-proprietorship, let your clients know well in advance that you’re exiting the business and when you plan to close. If there are outstanding contracts or incomplete work, put together a plan to complete the work before your closure. In the case of an LLC or partnership, let your business partners know that you’re facing financial issues and need to file a personal bankruptcy.
Sell Your Interest
If you want to file a personal bankruptcy and end your involvement with an LLC or partnership, consider selling your interest in the business. Your partners will most likely want to have the right of first refusal even if your business agreement doesn’t explicitly state that as a requirement. Its good business sense and critical to maintaining good relationships that you at least offer your partners an opportunity to purchase your interest in the business before you offer to sell to an outside party. Carefully examine your partnership or LLC agreement to find out what stipulations there are when dissolving the business relationship and make sure you follow the rules closely.
Stop Using Business Credit Lines
As soon as you decide that you’re going to file a personal bankruptcy and exit a business, stop using the business’ credit lines. Don’t charge anything to the business credit cards and don’t access business bank accounts or loans. Charging up a lot of debt on business accounts before filing a personal bankruptcy could land you in a lot of trouble. A matter of fact, you could be liable for repaying all of that debt despite your personal bankruptcy filing. In the cases where your business credit card debt is the same as your personal debt because you’ve personally guaranteed the debt, you could be held liable for repaying the full amount if it was charged right before filing a personal bankruptcy.
Negotiate Asset Allocation
If you’re filing a personal bankruptcy and exiting a business, it is critical that you negotiate what will happen to your share of the assets and/or intellectual property (IP) in the business. If your business was setup with the end in mind, your LLC or partnership agreement will clearly state what happens to assets, profits, and IP once one party exits the business. If that isn’t made explicit, you may need to carefully negotiate how to handle a “trademark” you mutually own or what to do with client relationships you exclusively cultivated. Of course, this asset allocation negotiation may be simple in certain businesses and extremely complex in others. But it’s important that you carefully work through the details and seek the advice of an experienced attorney so that you’re not cheated out of what you’re owed just because you’re filing bankruptcy and feel overwhelmed by the process.
If you’re filing a personal bankruptcy and trying to exit a business, talk to an experienced bankruptcy attorney today.