1. Keep Taxes Current. Rule Number One for the owner of any struggling business is to meticulously pay all payroll taxes on time, especially those withheld from employees' paychecks. Even if you operate your business as a corporation or LLC, the IRS and state tax authorities can hold you personally liable for these taxes plus penalties if they're not paid. And even if the business goes bankrupt, you are still personally and legally on the hook to pay them.

2. Stave Off Cash Flow Problems. When you realize you don't have enough revenue to pay the bills coming due, slow your "burn rate" immediately by cutting expenses to the bone. Then prepare a short-term cash projection and plan for your immediate needs. Make a list of the monies owed to you, and collect as much of it as possible. Pay the necessary items like taxes and overhead costs, but delay paying other bills by working with suppliers and other creditors.

3. Don't Lie About Debts. When a business starts to have financial troubles, its owner may frantically try to borrow more money. Before doing this, think carefully about whether your business is really likely to do better in the near future or if you're only likely to compound your debt problems by borrowing more money. If you do decide to apply for a new loan or to consolidate old ones, be forthright in disclosing the financial condition of your business. If you misrepresent your debts to get a loan, the law may regard your new debt as having been obtained by fraud. This would mean you are personally liable for the debts, even if you go through bankruptcy. Where big bucks are involved, the debt could haunt you for many years.

4. Be Careful About Transferring Business Property. Sometimes, out of desperation, a business owner will try to protect personal assets by hiding them. Since creditors are used to ferreting out such hidden assets, by and large these tactics are ineffective and are likely to give rise to civil and even criminal charges of fraud. Specifically, a business owner shouldn't
(1) transfer assets to friends or relatives in an effort to hide them from creditors or from the bankruptcy court, or
(2) conceal property or income from a court.

5. Avoid Preferential Payments to Creditors. The Bankruptcy Code frowns on your paying some creditors and not others. This is called "making preferential payments." If you file for bankruptcy, all payments you make during the year before the filing will be scrutinized by creditors to make sure that some creditors weren't given an unfair advantage by being paid while others received little or nothing. Outside of bankruptcy, if you owe money to creditors who hold collateral, the creditors have special rights in the property that is the security for the debt, but you may legally pay one unsecured creditor ahead of the others.

6. Protect Your Bank Account. If you face serious financial problems and owe money to a bank, it's often wise to keep most of your checking and other accounts elsewhere. This is because typically your loan agreement gives the bank the right to take your funds without prior notice if the bank thinks you're in financial trouble. (This is called a "setoff.") It can be a rude surprise to learn that your favorite lender has suddenly drained your checking account.

7. Plan for Ongoing Insurance Coverage. If your business winds up in a Chapter 11 reorganization or you end up in a Chapter 13 reorganization under the Bankruptcy Code, you may have a tough time finding an insurance carrier that's willing to renew your business coverage or one that's willing to issue a new policy. So if you're planning to seek bankruptcy protection, make sure you have insurance in place that extends at least 12 months into the future. You'll need to make payments on the policy as payments become due, but as long as you pay on time, the insurance can't be canceled, and you'll enjoy some peace of mind as you continue in business.

8. Don't Panic About Utilities or Your Lease. If you declare bankruptcy, the utility companies can't use your bankruptcy filing as an excuse for shutting off services, although they can require you to post a reasonable deposit to keep on the lights, phone service and heat. Similarly, as long as you continue to pay your rent, your landlord can't kick you out. Don't be spooked by the scary clause commonly placed in commercial leases that says you're automatically in default if you file for bankruptcy. These clauses are generally not enforceable (but may be enforceable against sublessees and assignees).

9. Consider Returning Some Leased Property. If you're leasing equipment and know you won't want to retain it after you file for bankruptcy, consider giving it back to the leasing company before you file. If you do so and the equipment is currently worth less than what you owe under the lease, this "deficiency" will get discharged in bankruptcy. On the other hand, if you prefer to keep the leased property, you'll need to continue making your lease payments on time -- when you choose to hang onto leased property, the obligation to make lease payments isn't discharged by your going through bankruptcy.

10. Don't Borrow From the Company's Pension Plan. Many pension plans don't allow you to borrow (or remove) money from the plan account. If you do, you could be assessed a penalty of up to 115% of the "borrowed" money. Worse, the plan could be "disqualified," meaning that all deductions would be disallowed, all plan assets distributed, and income tax and late payment penalties applied. Other plans may allow you to borrow money for approved purposes, but think twice before you do this: It leaves you with a smaller nest egg, and if you fail to pay back the loan, you could end up paying income taxes on the withdrawal, plus penalties of 10% to 25%.

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