If you’ve concluded that Chapter 7 bankruptcy may be in the cards for your small business, there are certain actions you should avoid taking. While it’s natural to try to come up with “creative” methods to pay down your debt or protect your assets, you can harm your bankruptcy case—or lose your right to file for bankruptcy altogether—if you do any of the following:
Hide assets. You may be tempted to give assets to your friends and relatives, change the title to property so it looks like you don’t own it, or “sell” property to loved ones for far less than it’s worth. Creditors’ attorneys and trustees are experienced in ferreting out these tactics, which can lead the trustee to take the property back or even charge you with fraud and prevent you from receiving a discharge of your debt.
Lie on loan applications. We know you need money to stay afloat. But overstating the value of your assets, inflating your income, or failing to disclose other debts on a loan application can lead to fraud charges. The bankruptcy court may refuse to discharge any debt that you took on through fraud.
Make preference payments. As explained above, the trustee will take a close look at all payments you made to creditors during the year before you file—and may take those payments back to distribute among all of your creditors. Any payments above a certain threshold made within 90 days before you file might be considered a preference; if the payment was to an insider creditor (a relative or close business associate), the court can take payments made over the past year.
Engage in shopping sprees and cash advances. If you buy luxury goods or services within three months before filing, the trustee will assume that you intended to defraud the court and your creditors. If you really splurge and buy a new car, vacation time-share, or similarly opulent purchase on credit, the creditor can argue that the debt is fraudulent, no matter when you took it on. And, cash advances for more than $825 taken within 70 days before you file may also be deemed fraudulent (if the creditor can prove fraud, even smaller advances will be suspect). In any of these situations, the debt won’t be discharged.
Pay off your unsecured debt or car loan. If you’re planning to file for bankruptcy, don’t bother paying debts that will be fully discharged. And, as discussed above, you’re better off owing money on your car when you go into bankruptcy; the more equity you have in the car, the more likely you are to lose it.
Take property from your LLC or corporation. If your corporation or LLC is insolvent, its assets belong to its creditors. If you take that property, you’re committing theft—which could result in the dismissal of your bankruptcy case or even criminal charges.
Pay yourself a bonus or back pay. The bankruptcy system treats you as an insider creditor. If you pay yourself a bonus, repay a loan you made to the business, or pay yourself back wages in the year before you file, these will be considered preference payments that the court can take back. It could also be considered fraud, which might result in dismissal of your case or worse.
Let your insurance lapse. If you may stay in business, or you simply need to keep your liability insurance while you wind down, file for bankruptcy just after you renew your policy. After you file, you may have a tough time finding a carrier willing to renew your coverage or issue a new policy. As long as you continue your payments, your insurance can’t be canceled just because of your bankruptcy.
Excerpted from Bankruptcy for Small Business Owners: How to File for Chapter 7, by Attorney Stephen Elias and Bethany K. Laurence, J.D.