Business Bankruptcy: When, How, and What Kind?

If you own your own business, and that business is in trouble, or even
just not doing as well as it once was, among the tools you should
consider using is a business bankruptcy. If you want to continue to
operate your business, but restructure its debt, your options are
Chapter 11, which is a business reorganization, and Chapter 13, which
is a personal reorganization. (In contrast, a Chapter 7 is a
liquidation.) How do you know which is the best choice?

Like any other bankruptcy topic, the answer depends on your situation.
Factors that will go into determining which is the best option
include how the business is organized (sole proprietorship,
corporation, partnership), how much total debt the business owes, how
much debt you personally have guaranteed for the business, and even
how much personal debt you have. Your business assets as well as your
personal assets may be a consideration. The most important factor of
all may be how the company is doing, and what the prospects are for
the future. Is the business on a downward slide, has it just hit rock
bottom, or is it improving, but not fast enough to keep up with the
demands of creditors?

There are some parameters that may make the choice easier. For
example, if you have a corporation, and there is very little
crossover between the corporate debt and your personal debt, Chapter
11 may be your only option. On the other hand, if your business is
unincorporated, or you've run it out of your back pocket, without a
lot of separation between personal and business assets and
liabilities, Chapter 13 may seem a better fit. But there are always
circumstances that can turn a typical case on its head. The only way
to make an informed decision is to consult an experienced bankruptcy
lawyer, and go through the process of examining both the legal issues,
as well as the practical issues. Legal issues include things like
debt limits, and how business debt is collateralized. Practical
issues include whether you need financing to continue to operate, and
whether the value of your business is worth preserving given the cost
of bankruptcy.

Are you getting the sense that the decision to file bankruptcy
requires a great deal of thought and planning? I hope so, because
that is the central message here. I would say that in almost every
case planning makes all the difference. You've heard about big
companies filing bankruptcy. Most of them do so only after weeks or
months of planning, communication with lenders and other parties, and
hiring consultants and other professionals to help in the turnaround
process. A small business may not require quite the same level of
planning, and it may not be economically feasible to hire turnaround
experts, but the more planning, the better the outcome is likely to
be. Some large Chapter 11 debtors even go into the filing with a
reorganization plan already approved by creditors, called a
prepackaged, or "prepack" Chapter 11. That doesn't work with every
case, but it certainly helps eliminate some of the uncertainty of a
bankruptcy reorganization.

Even if your reorganization isn't going to be a pre-pack, your
reorganization plan should be a part of your thinking from day one.
It is easy to get caught up in the mechanics of the bankruptcy
filing–the paperwork, the meetings, and the administrative tasks–and
overlook the long-term planning. Or, as we like to say around here,
get so busy fighting alligators you forget to drain the swamp. You
should go into a business reorganization with a clear idea of where
you want to end up. For example, your goal may be to extend
short-term liabilities into long-term debts, or convert debt to
equity, or even find a buyer for the business. If you are just sort
of vaguely thinking that bankruptcy will buy you some time to turn
things around, you are probably wasting your time and money. Time can
certainly help, but you need to have a plan to make it work for you.
And if you wait until the absolute last minute to consider bankruptcy,
or even to file bankruptcy, you are depriving yourself, and your
business, of a lot of the benefit of a bankruptcy reorganization. If
you feel your business is in in a downward cycle, and maybe especially
if you think things are looking up, but you are carrying too much debt
because of a downward cycle, consult an experienced bankruptcy lawyer
who can help you work through the options and plan for a more
prosperous future.

For more information on these matters, please call our office at 305 548 5020.

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