4 things to avoid when filing for Chapter 11

Chapter 11 bankruptcy allows businesses to reorganize, shed excess debt and restart operations from a more favorable ground. It also arranges for the payment of some debts to creditors in an orderly, hierarchical fashion. The creditors with the strongest claims get paid first.

The bankruptcy process therefore requires the debtor company to fully disclose all its assets and liabilities to the court and bankruptcy trustee so that the trustee can distribute the assets to the creditors fairly.

Did you know that you should stop paying your debts the moment you decide to file for bankruptcy (about 90 days before filing)? This is because the bankruptcy court and trustee, not you, should be deciding which creditors get paid and when.

There may be some debts you wish to pay off first. You may have debts to friends or family members, company insiders or other valued creditors. You should not pay these debts. If you do make any preferential payments within the 90 days leading up to your bankruptcy, the trustee can claw back those payments.

Here are three other things to avoid when filing for business bankruptcy:

Presenting misleading or messy financial records

If you have messy records, you could be accused of bankruptcy fraud. Remember, your financial records will be pored over by your creditors, the court, and the bankruptcy trustee. If there are inconsistencies between your financial statements and your tax records, you could be in hot water. If you have paid employees in cash, you need to be sure those payments are reflected accurately.

Undervalued or hidden assets

The most common type of bankruptcy fraud is probably misrepresenting or concealing assets. This could be mistakenly failing to list an asset on your bankruptcy schedules, or it could be due to deception.

Closely related is when a company lists an asset on the bankruptcy schedule but undervaluing it. Again, more than one set of trained eyes will be on your bankruptcy schedules, so you should be careful to be accurate about the value of your assets.

Transferring assets to family members or friends

In many or even most cases, companies can foresee a bankruptcy for a period of time before filing. As soon as you do, you should stop transferring any assets out of your portfolio. Small business owners have been known to transfer cash or assets to family or friends, often with the expectation that the asset will be transferred back after the bankruptcy is complete.

Attempting to shield your company’s assets from bankruptcy by transferring them to subsidiaries, executives or others could be considered bankruptcy fraud.

Considering Chapter 11? Get an experienced attorney involved as soon as possible.