BANKRUPTCY OPTIONS
Kinds of Bankruptcies - Corporations

When a corporate debtor faces insolvency or potential insolvency, the officers should realize that it has become vulnerable to various threats, including the following

• Lockouts and involuntary closure resulting from seizures of equipment and bank accounts. Chapter 11 can stop this, but Chapter 11 is limited and may require a restructuring of certain aspects of the business prior to filing. This requires planning and time.
  
  

• Just three creditors can force a debtor into an Involuntary bankruptcy prior to effective preparation. Or just plain circumstances can force a corporation into a bankruptcy too early with insufficient time to plan in advance. Planning in advance is necessary in order to mitigate (or maximize) the bankruptcy "lookback" period that the law imposes immediately upon filing. This can result in transfers of money to officers or the payment of legitimate debts being voided, officers and creditors being sued and the money returned to the bankruptcy estate.
  
  

• Insufficient documentation of transfers and contracts. This can render the corporation and its officers personally included in the lawsuits to follow. Or it can cause unintended results if it falls under the scrutiny of a bankruptcy proceeding.
  

  Unpaid employment taxes can fall back upon the officers and anyone else who had signatory authority on the corporate account. The manner in which this tax debt is addressed before seizures occur can result in the financial life or death of the officers who will be held individually liable by IRS.

These and other issues are often threats that management does not often appreciate in times of great stress. It may be expending the major part of its time and resources battling creditors or other matters that may not be able to do much harm in the long run. All too often, the most dangerous creditors are the quiet ones.

Perhaps the most important thing to remember is that when insolvency looks in the door, the rules change. The management that plays by the old rules may well end up losing much more than necessary.

Perhaps the most glaring example of misunderstanding is when the corporation owes the owners money. If so, then the owners are creditors of the corporation just like any other creditor. Is it not prudent to consider how the owners can be safely paid and perhaps avoid being sued?