If you are self employed and you reach the stage where your monthly expenses are greater than your income, it is time to consider what the best option is for you – foreclosure or bankruptcy? Do not wait until it gets so bad that you lose all your possessions before you take action.
There are different options depending whether your company is a close corporation, registered company, sole proprietor or if you formed a trust at the commencement of the business. A close corporation and sole proprietor are very similar. Depending how many members form part of the close corporation and who the person is with the signing powers, because that person will still be liable to all debtors where surety was signed in their own capacity. The same rules apply for sole proprietor. When you require a bank overdraft, buy company vehicles or require any form of business loan, you will sign on behalf of the company, but will be required to sign surety in your personal capacity as well. This is to cover the financial institution, or private debtor to make sure they get their repayments should the business close down. When you start a close corporation, it is advised to rather stipulate each member’s percentage and when problems occur in the business, the debt will be split between the members.
Do not make the same mistake many business owners make by increasing the mortgage on your property by getting second and third bonds. You will end up losing everything you own in the process. It is also not wise to apply for a whole lot of credit cards or get a further loan to cover existing debt and trying to make the business succeed by making further debt. This might work for a month or two, but what then? My advice is to rather consider either foreclosure or bankruptcy. Weigh up your options, seek professional advice and then decide what to do. Let us compare foreclosure to bankruptcy:
This happens when you get to the point where you cannot afford to pay your monthly mortgage and other accounts any longer. The bank holding your bond will start sending you letters of demand and if you do not respond to them, they start with legal proceedings. Most financial institutions will give you a certain period of time in which to try and pay the outstanding amount which will include additional and past interest costs. Should you not honor this arrangement, the bank will either put you out in the street, or your house will go on auction. Either way, in the end you will have to move.
With foreclosure, your name will be cleared sooner at credit bureaus than with bankruptcy, but it might not be the best option in the end. Should you lose your house it will be very difficult to get another mortgage should you wish to buy a property again. Even if you try and rent a house it will be a problem because if the owner of the house does a credit check and you are blacklisted, he will either not consider you for a lease agreement or if he does, you might have to pay a double or triple deposit before you can move in. Paying this deposit is a problem on its own because you will in all probably have a cash flow problem at this stage and where do you get the money to pay this deposit as well as a month’s rental in advance?
If you are the owner of a property and you start having problems, it might be the best option for you to put the house on the market before repossession occurs. Should you be renting, the owner might not be a very reasonable person. If you have signed a contract for a period of time you still have to honor the lease agreement. Advertise and try to find alternative tenants who will be prepared to take over your lease and then advise your landlord. Find yourself something more affordable in the interim.
When close corporations are having a financial crisis and you cannot find a solution, you will have to consider either foreclosure or bankruptcy. This is not an easy decision and definitely not a position you consider when you start your business, but it happens and you, as business owner, will not necessarily be prepared and have sufficient financial backup. The ideal situation will be to have loss of income policies which cover you in the event of a crisis.
The first step you should follow is to contact your debtors, especially the financial institutions you might have asset finance, mortgage bonds or vehicle finance with. If you are still in a position at this stage, offer them a repayment plan. Financial institutions are understanding if you approach them in time. They will rather accept an offer from you than taking the risk of losing all the money you still owe them. Should a repayment plan not be possible, it will be in your best interest to file for voluntary liquidation. Your assets will be sold and your debtors will get a certain percentage of the amounts owing to them. Should you wait too long, the financial institutions will start with legal action. You will receive summonses, the sheriff of the court will write up all your assets, which will include your house, vehicles and all your furniture. After this has been done, you get a period of time to make arrangements for lower repayments, but being in a financial predicament already, the chances of this happening is in most cases, not possible. Your vehicles will be repossessed by the banks and sold on auction and should the vehicle be auctioned and not cover the outstanding amount as per your purchase agreement, you are liable to pay in the difference, with monthly interest. The same happens with your property as you will have to pay in should the house get auctioned at a lower amount than the outstanding bond amount.
Did you plan and think carefully about foreclosure or bankruptcy? Even if you did, the odds are against you in the end. It is an endless struggle to get back to the financial position you were in before things started going horribly wrong. No financial institution will consider giving you a bond, vehicle finance or any other finance for many years to come because you will be blacklisted and unfortunately, before giving you finance of any sort, they check your credit rating at the credit bureaus. Even though you reach rock bottom, do not lose hope and faith. Get a job and make arrangements to pay debtors off even though it is very small monthly amounts. In this way, you will keep the sheriff away while you start to get back on your feet again even though this might take many years.
Does your business partner ever think about foreclosure or bankruptcy? Bankruptcy very often happens, not through your own doing, but having a business partner that takes too much money out of the business which will cripple your business in a short period of time. Drawing up of contracts at the commencement of a business is therefore very important. Come to agreements regarding salaries and keep your overheads as low as possible initially to ensure there is sufficient funds to cover your expenses and buy stock if that is your line of business. Another disadvantage is when you render services to clients and they do not pay you immediately. Make sure that you get a deposit from the client when they place their order and the balance outstanding upon delivery. Clients very often place orders and demand a quick delivery, but their payments are not as important to them. It cripples small business especially, when clients do not pay on time and they do not realize that you depend on their payments to keep your business out of the red.
You can see from the above that, when things start going wrong and you realize you cannot cope financially, to decide which option is better for you – foreclosure or bankruptcy. No matter whether you decide on foreclosure or bankruptcy, neither one is a very pleasant situation to find yourself in. Plan well in advance and make sure to put funds away in a different account every month in the event of unforeseen expenses which occur. Do not exceed your budget and never take money, other than salaries, out of the business account. Keep your personal and business accounts separate, appoint a reliable bookkeeper and auditor to make sure your financial statements are in order and up to date. When your business has grown and you are required to pay taxes, do so at the required time which is usually every two or three months. In this way you will not have the IRS at your doorstep because you have failed to make payment on time.
Make sure you fully understand the difference between foreclosure and bankruptcy and keep this in mind at all times, even if your business is doing very well. Things do go wrong and before you realize it, you can go from a healthy financial position to the blatant facts mentioned above.