Ten Common Pre-Bankruptcy Mistakes


Pretending Nothing's Wrong. Although optimism can be a wonderful trait, refusing to face up to financial challenges when your business is in trouble will do more harm than good.

Keeping the Fat. It's essential to look at expenses with a ruthless (and unselfish) eye when bankruptcy looms. That may mean giving up your prime parking spot, flying coach, or even laying off the brother-in-law that you hired as a favor to your little sister.

Keeping Your Employees in the Dark. Although you don't have to divulge every financial detail, it's best to be straightforward when it comes to communicating with your employees. If they understand the full picture, they may be willing to accept short-term pay cuts or reductions in hours in the interest of long-term security.

Deceiving Your Creditors. If you're honest with your creditors, they may be willing to cut you some slack in order to maintain your business relationship. In addition, if you do end up filing bankruptcy, your fraud may come back to haunt you: in some cases, money obtained by fraudulent means must be repaid even if bankruptcy is filed.

Laying Off Critical Personnel. Although it may seem like a good money-saving strategy to let go of highly paid workers, there's no way your business can pull itself up by its bootstraps without your best people.

Pledging Personal Property as Collateral. When there are no longer business assets that can serve as collateral for loans to keep your business afloat, it may be tempting to pledge your house, but if things don't improve, you could then stand to lose not only your business but your family's home, too.

Dipping Into the Wrong Cookie Jar. It can also be tempting to dip into any ready source of cash in a crisis, but such impulses should be tempered. Some cash-starved businesspersons have been known to borrow from resources like payroll tax reserves with the intention of catching back up later and paying them back, but if that becomes impossible, the interest and IRS penalties, to say nothing of potential officer liability, will be worse than getting your fingers slapped by Mom.

Letting Your Reserves Dwindle Down to Nothing. You should always have some cash on hand. Even if you do end up filing bankruptcy, you stand a much better chance of successfully reorganizing and making a go of it post-bankruptcy if you have some reserves.

Being Disgraced by a Bankruptcy. Although going bankrupt should not be high on anyone's to-do list, it is important to remember that filing bankruptcy is a respectable option when all other efforts to revive a business in financial crisis fail. Bankruptcy is a constitutionally provided vehicle to a fresh start, not a shameful disgrace.

Going It Alone. In times of crisis, you need the strongest and smartest allies you can find. Your business or bankruptcy attorney can advise you on the most prudent courses of action to preserve your business and personal assets and protect your long-term financial interests. Even when money is tight-especially when money is tight-the counsel and support of an experienced lawyer are worth every penny.

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