How a CPA can assist clients going through bankruptcy

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Bankruptcy cases are on the rise following the coronavirus pandemic. CPAs can strengthen their knowledge base in bankruptcy accounting to partner with clients, colleagues and legal counsel, assisting those in the middle of bankruptcy or on the brink. It’s vital to carefully and skillfully guide clients through financial aspects of insolvency or bankruptcy without crossing the line into legal advice.

Insolvency: two paradigms

Financially speaking, insolvency is when total liabilities exceed total assets. On the flip side of the same coin, bankruptcy law views insolvency as when current liabilities exceed current assets. The IRS considers the former rather than the latter.

Financial security: Aid without getting caught in the crossfire

Accountants can offer assistance despite which definition applies to their client’s case. If you’re wondering how an accountant can make a living assisting clients who have trouble with their financial commitments, you’re the shrewd-thinking, financially conscientious professional needed in the business world.

While it’s true accountants must be careful with the roles and clients they take on, they are entitled to prompt payments under certain circumstances, statutes and laws. However, if there’s no money leftover after priority creditors are paid, your work could be pro bono.

It might go without saying that an accountant would do best to keep accounts current regardless of anticipated bankruptcy and track receivables to best ensure their financial security. It’s possible to insist on current and prompt payment for services.

In the case of sticky ethical situations in which an accountant is told how to handle their company’s taxes from higher-ups, it's never okay to withhold payroll or sales taxes when a company is in dire straits with money. Doing so is a sure-fire way for accountants to find themselves in legal troubles amounting to thousands of dollars in fines or jail time. CPE ethics courses can help Ohio accountants navigate these tricky scenarios.

Statement of financial condition

Accountants will be called on for their expertise in areas such as reviewing assets and liabilities. They’ll identify what can be liquidated or borrowed to pay off debts as well as jointly held resources. CPAs can prepare these statements in case the IRS or bankruptcy court requests them. Creditors would also love to get their hands on this and additional information about your client, but they aren’t entitled to them – make them stick to what they can find in credit reports.

Budget

Debt and bankruptcy can have many roots: medical expenses, job loss, failed business, underwater on loans, etc. CPAs can help educate clients to make smarter money choices going forward. Those facing bankruptcy can use an accountant’s skills to create and stick to budgets, adjust their spending, obtain repayment plans and negotiate an installment agreement for paying taxes.

Liquidate assets to pay debts

CPAs know paying off high-interest rate debts is a smart money move. They can assist clients in finding the right mix of selling assets and borrowing to pay off the most expensive or damaging debts first. For example, just looking at retirement funds, an IRA could be liquidated but not a 401(k), and clients might not know that. Help them protect some investments while borrowing against others, because some decisions that seem like no-brainers can actually backfire.

Negotiate

CPAs can help arrange debt settlements and develop restructure plans. Talking with creditors to extend repayment dates or settle for an adjusted amount can be a huge burden off a client’s shoulders, and experienced accountants have the esteem needed to help negotiations move forward in good faith. Tasks like obtaining loans, reducing expenses, paying off debts and lowering interest rates and principal payments can be of great help.

CPAs can assist lawyers in debt settlement cases. Even creditors and debt collectors could use accounting knowledge of cash flow values and debt repayments to negotiate with their debtors on settlements and repayment plans.

Filing

Entities have several options for filing for bankruptcy or closing down their businesses. CPAs can guide clients to the strategy that would serve them best.

A business whose customer goes bankrupt

Clients aren’t always the insolvent party. Sometimes it’s a business in need of help with a customer who has gone bankrupt. The business may need a CPA to advise the customer about switching delivery terms, such as going from Free on Board to Cash on Delivery or Cash in Advance. Such clients might need assistance with requesting and considering the value and integrity of assurances or guarantees.

Additionally, accountants familiar with bankruptcy understand that timing can mean the difference between priority assurances or preference establishments. Having (or switching to) a LIFO cash flow accounting method could be a company’s best option for getting paid.

CPAs should be prepared to offer advice about what to pay and what concessions to negotiate for from creditors. This takes careful consideration as wise decisions now lead to better outcomes for a client's future endeavors.

Timing is so important when it comes to insolvency and bankruptcy. Paying off older debts can sometimes backfire. And beyond tricky timing requirements, bankruptcy rules can turn seemingly sound decisions into disadvantages. CPAs can help clients make the wisest decisions.

However, there can be a fine line between financial advice and legal advice in bankruptcy cases. Accountants must be careful and communicative about not offering legal advice while protecting their own financial security. Accountants familiar with bankruptcy are well-positioned to navigate these intricacies and add great value to their client relationships.