Liquidating your business outside of bankruptcy can give you more control over the process and provide many additional benefits. Read on to learn more about what to consider when liquidating your business and negotiating with creditors.
Liquidating the business yourself has several advantages over filing a Chapter 7 bankruptcy on its behalf. When you file a business Chapter 7 bankruptcy, the bankruptcy trustee takes over the entire liquidation process. This means that he or she sells the assets of the business and pays its creditors according to their priority. (To learn more, see Chapter 7 Bankruptcy for Small Businesses.)
If you liquidate the business yourself, you retain control over the entire process. You can usually sell the company’s assets for more money than the bankruptcy trustee would get for them, and may be able to pay off all your creditors. Further, doing it yourself also allows you to choose which debts get addressed and settled first. This can be especially useful if you are personally liable for certain business debts.
It’s important to make a list of all business assets before starting the liquidation process. Also, you should distinguish any secured or leased assets from the ones the business owns free and clear. These assets normally may not be sold or assigned without approval of the secured creditor or lessor.
After identifying all assets of the business, you can go about trying to sell them. You can use a variety of avenues to sell the assets including connections in the industry, interested competitors, or traditional advertising. However, you cannot give away or sell the assets for significantly below market value. Because you have a duty to minimize loss to creditors, you should sell the assets at a commercially reasonable price. If you have a significant amount of assets, getting a good price may also allow you to pay off all creditors and pocket the rest of the money.
In most cases, you can negotiate settlements with creditors for less than what you owe them. Creditors will usually accept less money rather than go through the expense of suing you or risk getting paid even less if you file bankruptcy. However, be aware that settling a debt for less than its full balance may result in additional tax liability if the IRS considers it income. (See Tax Consequences When a Creditor Writes Off or Settles a Debt.)
If you are personally liable for any business debts, you should take extra care when dealing with these creditors. These usually include trust fund taxes or obligations you personally guaranteed. Since these creditors can go after your personal assets if the business assets are not enough to satisfy the debt, you generally want to negotiate with and pay them off first. When settling these debts, be sure that the creditor releases your personal liability along with the business.
(To learn when you might be personally liable for business debts, see the articles in our Small Business Bankruptcy area.)
When it comes to secured creditors, you need to make arrangements to return the collateral if you don’t want to keep it. Keep in mind that if you return the collateral you may end up owing a significant deficiency balance if the creditor sells it for less than what you owe. Consider negotiating with the creditor about how to sell the property if you think you can get a better price, or ask that the creditor "forgive" any resulting deficiency. Alternatively, if you want to keep the asset you can negotiate a price to buy it from the creditor in full satisfaction of the debt.