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When Should a Small Business File for Bankruptcy During the Pandemic?



As COVID-19 cases skyrocket, businesses’ coffers are plummeting.

More than six million people have filed for unemployment. Big-name industries like petroleum miners and internet providers are filing for bankruptcy. And while small businesses are being offered special loans and deals, it still may not be enough.

That’s why we talked to debt expert Steve Rhode about whether you should file for bankruptcy as a small business owner during the pandemic.

So should you file? Here are three tips.

Rhode would know about bankruptcy – he went bankrupt himself in 1990.

Now a financial journalist and self-proclaimed “Get Out of Debt Guy,” Rhode used to run a real estate company called the Great Virginia Land Company with three employees. But after the economy dipped in 1989, he wound up filing for bankruptcy and accruing more than $26,000 in credit card debt.

When Rhode got out of debt, he vowed to help others do the same. Here are three tips he has for small business owners considering bankruptcy during the pandemic.

1. Take a breather

The first thing to do, according to Rhode, is to make sure you don’t lose your mind.

“Debt is nothing more than a math problem wrapped in emotion,” he said. “Right now, a lot of [small business owners] are panicking.”

Small businesses are disadvantaged when it comes to this pandemic, Rhode told Many are paying bills month-to-month and don’t have enough money in the bank to tide them over as bigger companies do.

But that doesn’t mean you should make a rash decision.

“[Small businesses] may jump right now to think about filing bankruptcy. However, the best answer is: don’t,” Rhode said. “This is just the beginning of a crisis. If you rush and file bankruptcy now and wrap things up, it doesn’t mean that more surprises or liabilities might not come behind that.”

So for now, take a “brain break.” Take all your mail and put it in a box to be dealt with within a few days. Don’t run to your creditors just yet.

“Give yourself a chance to regroup and mentally prepare that this is a battle and not personal,” Rhode said.

2. Talk to at least three bankruptcy attorneys

Once you’ve calmed down, you want to know your options – and you also want to know which bankruptcy attorney you could work with.

But don’t stick with the first one you come across. Talk to about three.

“One’s going to have no customer service, another is going to be very friendly, and the other is going to be your best friend,” Rhode said.

Educating yourself is the most important thing you can do right now, according to Rhode. Talking to an attorney can help you decide which type you may file and what the future of your business looks like.

You don’t need to file that day, or that week, or that month. It’s just about getting answers to some of your biggest questions and preparing for the worst, Rhode said.

“The biggest enemy that any small business has right now is not the creditor; It’s not the cash flow; it’s not the bank account,” Rhode said. “The sole enemy is making poor decisions without information.”

3. Wait until the last minute

You don’t want to file until you absolutely have to, Rhode said – and that’s because nobody can predict how long the pandemic and its economic fallout will last.

About 75% of people file for Chapter 7 bankruptcy, which is often the fastest and cheapest way to do it, Rhode said. But once you file, you can’t file again for another eight years. It’s better to save that option for when you’re certain you need it.

Even if you get sued, you can still file bankruptcy and discharge the lawsuit, Rhode said. But nothing about the situation is going to be fast or easy.

“It’s not just your company that’s having issues. It’s suppliers, your customers, the people around you,” he said. “All small businesses should be prepared that this is going to be a long haul.”

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