Bankruptcy Alternatives
November 30, 2008
Few entrepreneurs would state that they wouldn’t try almost any alternative to avoid business bankruptcy. In addition to the financial impact on the owner, employees, and creditors, business bankruptcy takes an emotional toll as well. If you have an ailing business, you should take the necessary steps to fix the business and avoid bankruptcy. It won’t be simple, but on the other hand, only about ten percent of businesses who have gone under Chapter 11 filings ever recover. So, if at all possible, work to avoid business bankruptcy rather than use it as your first attempt to save an ailing business.
Chapter 7 is an even less desirable option than a Chapter 11 bankruptcy filing. A Chapter 7 filing simply liquidates everything connected with the business and may still leave you with certain attachments against your personal assets. For instance, employee payroll taxes can be covered by attaching the business owner’s personal assets.
A business bankruptcy is painful financially when you must sell assets typically at a loss to you, and you must pay for the services of the bankruptcy attorney in order to get the bankruptcy filed correctly. These specialists in bankruptcy law don’t come cheap. In addition to the financial impact there is a tremendous emotional impact as well to both you and your employees.
Some of the disadvantages of a business bankruptcy include:
Attorney fees - filing for bankruptcy may be the last option to save a dying business, but the hefty attorney fees must be paid, usually in advance. A bankruptcy judge can even order liquidation of the company to pay for the attorney fees and court costs.
Control - when your business is in bankruptcy status, even with Chapter 11, you lose control over all the major decisions of your company. The bankruptcy court gets to decide how your business will be run.
Taxes - going through a business bankruptcy does not eliminate unpaid taxes on your earnings. The Internal Revenue Service can collect back taxes and seize company assets, even when the company is bankrupt. Employment taxes which have not been paid can result in seizure of the owner’s personal assets.
Chapter 11 filing usually makes things worse for the business. Chapter 11 is followed by Chapter 7 in about 90 percent of the cases.
One or more of the following action steps may be used as an alternative to a business bankruptcy.
Downsizing - This is often the most logical first step in cutting back expenses. The business owner may be forced to let 60% of the employees go in order to save the business and the jobs for the remainder of the employees. If cutting back on staffing is in the future for you, make sure you follow all the personnel rules and requirements in letting people go. If you don’t have a written personnel policy to cover terminations of this sort, you’d be wise to have one in place as soon as possible. You need to think about such things as employee benefits, layoff notices, potential labor contract requirements, accrued sick leave, vacation or holiday time, and even contract payouts.
Restructuring Debt - Make every effort to contact creditors and negotiate a more lenient payback plan which will extend payments over a longer period, or perhaps reduce interest rates on the debt. Most vendors will agree to work with business owners to develop a plan for repayment, especially when the alternative is a Chapter 7 filing which may result in no return at all for the creditor. Even if you were to choose a Chapter 11 filing, you would still need to provide a workable debt restructuring plan.
Turnaround Specialist - Rather than spending money on an attorney to manage a bankruptcy, why not explore the services of a turnaround specialist. As the name suggests, these are individuals and firms experienced in working with the management of ailing companies in order to point our solutions to problems which are causing the business to be less than healthy. These turnaround specialists firms have experienced people who know how to pinpoint the problem areas and suggest solutions which work.
Cash Flow - Often the problem with a business which is sliding downhill into bankruptcy is not the debt it carries, but the cash flow. The debts may become due and payable at one time, while the cash doesn’t arrive until days or weeks later. The importance of a good accounting system can’t be denied, but it helps to understand the flow of the cash and how it might be adjusted to help provide an alternative to bankruptcy.
Collecting Cash - Tied to the cash flow of the business is the matter of collecting cash owed to the business. While your customer’s may appreciate your lenient receivable policy, you need to keep receivables at the lowest possible level consistent with good customer relations. As a small business owner particularly, you don’t have the luxury of procrastinating. You need to develop and follow a systematic and consistent collection schedule. You can still be flexible with your customers in the case of extenuating circumstances, but ensure that a firm repayment date is set and held to. If you can see that collection from the customer is not happening, there is a time when it’s better to turn the account over to a collection agency and write it off your own books.
In addition to the above alternatives for avoiding business bankruptcy, you may be able to cut salaries for management and or employees. Again, less money for a while is certainly a better option than losing the business completely. If you’re behind on the tax bill, try to work out an installment plan with the Internal Revenue Service. Don’t try to hide the situation from your employees. Let them know what’s going on and if possible, how they can help. Company loyalty will go a long way in helping to keep your business going even if times are tough.
Finally, make sure you know precisely what your personal obligations will be in the event that you can’t avoid business bankruptcy.