Tax trouble firms’ most likely road to bankruptcy – Albuquerque Journal

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Bankruptcy is a specialized area of law with its own elaborate code, procedures, vocabulary and even its own judges. In every city theres a small group of attorneys who have mastered the arcana. They see each other repeatedly because every bankruptcy case involves as many parties as a debtor has creditors.

The insiders tend to treat each other with respect if only to avoid being retaliated against in next weeks case. But since their job is to divvy up a finite amount of money, they have every incentive to take advantage of outsiders. Non-specialists who blunder into bankruptcy court can cost their clients a lot of money through sheer cluelessness. They may never know what theyve done.

I asked Albuquerque bankruptcy lawyer Gerald Velarde what are the most common mistakes small-business owners make that land them in bankruptcy. Without hesitation he said, Taxes.

Especially federal payroll taxes. Any business that withholds taxes from its employees paychecks but then fails to pay the money into the Treasury is, in effect, borrowing from the IRS. Your local loanshark is more likely to be forgiving. Cheating on state gross receipts taxes is another classic spin in a companys death spiral.

Any business owner who is even tempted to hold back on taxes in order to pay current expenses needs to see a bankruptcy attorney before things get out of control. The filing of bankruptcy automatically puts a stop to most collection efforts. But, Velarde emphasized, it provides no solution to a deficient business model. If a business suffers from a lack of customers, the best course may be to wind it up.

Chapter 7 of the bankruptcy code offers straightforward liquidation. Most personal debts, including personal guarantees of corporate debt, can be discharged in Chapter 7. Discharge means the creditor has to accept whats available and cannot afterward pursue the individual for the balance. Chapter 7 wipes the slate clean, allowing society to benefit from an entrepreneurs determination to start afresh.

But if a business is a solid one suffering through a temporary slump, bankruptcy can also offer the promise of reorganization. Chapter 11 is famous because the big boys use it, from General Motors on down, but its expensive and complex. The filing fee alone is an astronomical $1,717. Any competent bankruptcy practitioner will ask for an up-front retainer in the tens of thousands of dollars. And only about half of Chapter 11 reorganization plans ever get approved, anyway. For the rest, Chapter 11 is just a toll road to liquidation. (Remember Borders?)

Small businesses can often pursue an alternative form of reorganization through Chapter 13, a much-less-cumbersome and expensive procedure. The filing fee is $310 and the typical retainer is proportionately lower, too. Chapter 13 comes with many restrictions including debt limits its not available to those in really deep but for those who qualify, it buys time to cash out illiquid assets such as real property. Also, tax debt can often be paid off over a period of years without penalty or interest. If the bankruptcy court approves a Chapter 13 reorganization plan, a sole proprietorship can continue stronger than before.

On the other side of the ledger are creditors. Banks and other moneylenders know what theyre getting into, but its common enough for small-business owners and ordinary homeowners to make an advance payment to a contractor, say, only to have the contractor declare bankruptcy. In such circumstances, the ordinary business person can unexpectedly find him or herself cast in the role of creditor, dragged willy-nilly into bankruptcy court.

If you ever receive one of those daunting bankruptcy court notices, the single most important thing is to move quickly. Bankruptcy deadlines are tight and unforgiving. You need to file a claim and pay close attention to every notice you receive from the court or the lawyers. In the end you may receive only pennies on the dollar, but the alternative is zilch. If your claim is for a sizable sum, youre almost certainly better off hiring a lawyer to steer you through the maze. Just be sure the lawyer you pick is a member of the club.

Joel Jacobsen is an author and has recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at legal.column.tips@gmail.com

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Tax trouble firms' most likely road to bankruptcy - Albuquerque Journal

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