Is Bankruptcy Your Silver Bullet?

Business bankruptcies were 40 percent higher in May 2009, at 7,514,  compared to one year earlier. Trade insurance giant Euler Hermes expects business bankruptcies to increase by 45 percent between 2008 and the end of 2009. A study by bankruptcy scholars Robert Lawless and Elizabeth Warren, along with research from Jupiter eSources, indicates the current business bankruptcy rate tops 15 percent. With the waning economy, researchers believe the peak of bankruptcies has not occurred yet. And after the recession ends, they expect bankruptcies to continue at a high rate for at least a year.

Recently, I’ve seen an uptick in readers asking for business bankruptcy information. With consumer and commercial spending in decline and credit constricted for most companies, many small business owners, who never expected to be in this position, are facing the prospect of bankruptcy.

Is bankruptcy the right decision for you?

• Are your ongoing business expenses greater than your ongoing business income?
• Do you see a light at the end of your financial tunnel? Is there a specific scheduled event, which will turn your business around?
• Can you simplify your business in ways that would make it more profitable?
• Is there anything different or new you can do to produce income to energize your business? Have you brainstormed with business associates, family, and friends? Sometimes those around us see talents we don’t recognize. Before you throw in the towel, it can’t hurt to ask.
• Has your banker been unwilling to work with you to extend your loan, while pressuring you to file for bankruptcy?
• As much as you want your venture to succeed, have you accepted the smartest action is to dissolve the business and discharge debts?

The court requires you to have an attorney for a business bankruptcy. You want to find an attorney who specializes in small business bankruptcies and has worked with a number of businesses similar to yours. Last year, a reader with who owned a mature, diverse construction company in New Mexico, faced an unexpected collapse of his business when a major builder abandoned a large development project. By finding a bankruptcy attorney with significant experience helping other contractors, he was able to structure a smooth bankruptcy that enabled him to preserve the one remaining profitable segment of his business.

If you have incorporated and you have not guaranteed any business loans with your personal credit, you should be able to discharge all of your business’s debts through bankruptcy just as a major corporation would.

However, in partnerships and sole proprietorships, or if you have guaranteed loans with your personal credit, it is likely that your personal credit will be severely damaged by a business bankruptcy. It is important to not mix your personal credit with your business credit. When we form a new business, most people don’t think about the what-ifs related to bankruptcy. It’s common to mix personal credit with business credit, especially when your excellent personal credit can mean you get easy access to funds for your business. When everything works out well, you never think about it. When the economy deals a body blow to your enterprise and bankruptcy slams your personal credit along with your business, it’s a frustrating experience.

If you know bankruptcy is inevitable, it’s best to go ahead and file. Start the clock ticking. You absolutely can come back from a credit disaster. Once bankruptcy is discharged and your slate is wiped clean, it will take two years for you to build excellent personal credit. However, you can start a new company with a fresh slate as soon as you pull together start-up capital. You will want to carefully build a solid credit foundation for your new business.  

Because this recession has had a direct impact on a wide swath of the country, the negative stigma related to bankruptcy is gone. While it would have been considered the ultimate financial fiasco a few years ago, bankruptcies – like foreclosures – are happening at every socio-economic level now. Although personal credit will be trashed until you re-build it, and a bankruptcy does remain on your personal credit record for 10 years after it’s discharged, if you tell people what happened before they see your credit report, bankruptcies caused by this recession are likely to be understood by most potential creditors. And any new company can build its own credit history.