When bankruptcy looms
June 11, 2008: 9:40 AM ETAn owner whose business may not make it explores his options.
Ron Swall, Lawrence, Kan.
We are a very small family landscaping business (sub S-corp). We were in debt about $12,000 before the season began. We're looking at borrowing up to $10,000 more to carry us until the work season picks. If we can't make it, is bankruptcy an option, and which option (Chapter 7, 11, 13?) offers us the best out? What are the important questions I need to ask when I consult with an attorney?
By Soo Youn, Fortune Small Business contributor
Dear Ron: You should turn to bankruptcy as a last resort. Most vendors who are owed money would prefer that you work out a structured payment plan rather than declare bankruptcy, since that typically means they won't get paid much, if anything, says Chicago business consultant Ken Gaebler.
Moreover, bankruptcy can be a permanent stain on your record, making it difficult to ever be in business again.
Bankruptcy experts and consumer advocates recommend that you explain your situation to everyone you owe money to and see if they can work with you to help pay down what you owe.
"This is not the time to give up. It's the time to get creative and think outside the box on ways you can get the money to reduce your debts," Gaebler says. "Maybe a loyal customer is willing to loan you some money or take a partial interest in the business. Maybe you can offer discounts for pre-payments for the upcoming season."
If you do opt for a bankruptcy filing, it's hardly an easy out. Chapter 7 and Chapter 11 are business bankruptcies. Chapter 11 is complicated and complex and shouldn't be considered unless you are convinced your business will survive, says bankruptcy lawyer and Southwestern Law School adjunct professor Ed Wolkowitz. Chapter 7 is liquidation, and is not a good option if any of your debts are guaranteed personally.
Chapter 13 is a personal bankruptcy declaration.
"You have very little control over what gets liquidated so it's a dangerous proposition," says Gaebler. "The main reason you formed your landscaping firm as a legal entity was probably to protect your personal assets, so Chapter 13 is not a very good choice for you."
A good place to start reading on Chapter 13 is Consumer Action's personal bankruptcy online guide.
If, in the end, you do choose to meet with a bankruptcy lawyer, ask about pass-through liability, advises Wolkowitz.: "Certain types of debts, primarily tax debts, are pass-through debts, which means you cannot escape them.
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Related links:
The bankruptcy option that's right for you
Getting a loan after bankruptcy
