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How to Protect Your Small Business’s Assets from Creditors During Bankruptcy

According to the SBA, 60,837 businesses filed for bankruptcy in 2009. Starting and running a successful business, no matter how experienced or talented you are, will be one of the most difficult endeavors in your life.

Remember that no matter how far in debt you go, bankruptcy is always your choice. You don’t have to file it unless you really think it’s time to start over.

If you do fall on hard times and bankruptcy appears as the best option, follow these tips ensure you protect your assets to the maximum extent possible:

  • Consult with a Lawyer
    This is by far the best advice to take away from this post. Ultimately, only a lawyer practicing in the jurisdiction where you do business can tell you exactly what you need to give yourself maximum protection. However, you can take additional steps that generally work in all jurisdictions to keep your business protected.
  • Don’t Mix Business and Personal Assets

    This doesn’t guarantee your business assets will remain safe from bankruptcy. But, it does give you the best chance that at least your personal assets will remain safe from creditors.

  • Act Before You Receive a Judgment If you receive a notice in the mail stating a creditor successfully levied a judgment against you, it’s too late. At this point, the damage is done. If you make any monetary transfers to protect your assets, courts could declare them to be fraudulent. This means your creditors could take additional action against you.
  • Act Quickly and Initiate DiscussionsIf you act first in bankruptcy and appear as though you are doing everything possible to repay your debts, your creditors are more likely to strike deals with you. There’s no written rule or legislation guaranteeing this, but it helps tip the odds in your favor.
  • Structure Your Business Properly (Hint: Avoid a Sole Proprietorship)A sole proprietorship is your default business structure if you don’t report one to your state or the Federal government. As an individual, you own all debts and assets of the business, which means your personal assets are at risk during bankruptcy. A partnership, LLC, or corporation protects your personal assets in part from a business bankruptcy.
  • Convert Non-Protected Assets to Protected Ones Before You FileThis has to be done in a very particular way, so if you’re considering bankruptcy, think about contacting a lawyer who can tell you exactly how to do this in your jurisdiction. Where you put assets in order to protect them can differ markedly from state to state.
  • Thinking Ahead is Key Remember, by thinking ahead and acting before you actually file bankruptcy, you put yourself in the best position for protecting your assets. Do this as far possible in advance and make sure you contact a lawyer as soon as possible!

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