Can Accountants Recommend Bankruptcy?
E.J. Simonsen | Sep 14, 2022
As an accountant, it's your duty to provide your clients with the best possible financial support for their specific needs. The exciting parts are starting a business, expanding or merging businesses, and helping your clients grow or save money. Unfortunately, any job has its downsides, and for accountants, that might be when your clients aren't doing well.
But as an accountant, it's your responsibility to recommend and guide those businesses on how best to make and keep their money. So what happens if your client is struggling to pay their bills or find a way out?
Here's what you need to know about recommending bankruptcy as an accountant.
Can an Accountant Recommend Bankruptcy?
In simple terms — yes. If you know that your client's best option is to file for bankruptcy, that's the best recommendation you can make.
We know that it's never easy to recommend business bankruptcy — it's not something we like to do for our own clients, either. But, if your client's business is struggling financially, it's your responsibility to make them aware of the best options available.
When is Bankruptcy the Best Option for a Business?
As a CPA, you're in the business of making and protecting your clients' money. And if most of your clients were relatively successful before the global pandemic, you may not have had much experience advising a client about bankruptcy. Unfortunately, in the wake of the pandemic, businesses across a variety of industries are struggling, and for many, bankruptcy may not just be the best option, it might be the only option that can save the business and protect the business owner's personal finances.
Here are a few signs that a bankruptcy might be the best solution for one of your clients:
They Can't Refinance
If a business is struggling to make payments on a loan, and no lender will offer them refinancing, this is a sign that they're running out of options. Refinancing short-term or problematic debt is a common option and should be available to most businesses. The problem arises when lenders aren't willing to take the risk. This may be a sign that the business will soon fall behind on payments or that even after refinancing, the bank doubts its ability to make the payments.
They Can't Make Looming SBA Payments
The SBA awarded hundreds of millions in loans due to COVID-19. As these SBA payments become due, many businesses realize they will struggle or be unable to make the payments. If your client knows they can't make their SBA payments, bankruptcy may be the best way to lower the balance or payment.
They Owe Two+ Quarters of Payroll Taxes
After two quarters of missed payroll taxes, it becomes very difficult for most businesses to recover. In fact, in the state of Texas, you — the accountant — could be held personally liable if your client fails to remit either sales or income tax. It's best to get to the root of the problem and consider options as soon as you know the client can't pay their payroll taxes.
What Kind of Bankruptcy Can Accountants Recommend?
An accountant can recommend any bankruptcy option that best fits their client. Traditionally, these have been Chapter 11 and Chapter 7 bankruptcy. But, what many CPAs aren't aware of is the new Chapter 11, Subchapter 5 business bankruptcy.
Subchapter 5 is a new, viable option for many small to mid-sized businesses (or their owners if they are a sole proprietor and not a corporation) and one that all CPAs should be aware of for the benefit of their clients.
What Should Accountants Know About Subchapter 5 Bankruptcy?
Chapter 11, Subchapter 5 is a new bankruptcy option that makes the traditional reorganization bankruptcy more accessible to smaller businesses. If you're new to Subchapter 5, here's what CPAs need to know about how it can help your clients:
- It's the best option for small businesses trying to get back on their feet. Compared to other bankruptcy options, Subchapter 5 is more affordable and faster to move through.
- It's a reorganization bankruptcy. Your client's business can remain open through bankruptcy, which gives them a greater chance at a successful reorganization and a profitable future.
- Subchapter 5 gives accountants a say in business restructuring. As a CPA, you have a deep understanding of your client's finances. With Subchapter 5, you have the opportunity to use that knowledge in support of your client's financial restructuring. You help them build a new financial plan that helps them become more profitable now and in the future.
- It's a win-win solution for all parties. Subchapter 5 helps your client keep their business, but it also helps you retain a client — and one that will become more profitable in the future.
New to Subchapter 5? The Lane Law Firm is Here to Help
Chapter 11, Subchapter 5 business bankruptcy is new to most accountants. Since it's only been available for a short period of time, it can seem like an unknown or a risk. In fact, The Lane Law Firm has already helped a number of our clients come out ahead of significant business debt with Subchapter 5. If you want to know more about Subchapter 5, the process, or how it can help your clients, just get in touch with our experienced bankruptcy attorneys.