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What to Consider Before Filing for Bankruptcy

Author: Cotner Date: December 10, 2010

Filing for bankruptcy is a humbling experience, but it’s one that can save your business if you do it right.

If you’re insolvent and can’t pay bills as they come, if a bank is moving against your assets and if you feel you don’t have time to mitigate such problems, consider filing for bankruptcy.

Chapter 11 bankruptcy provides the protection of reorganizing a business while running it. (Individuals file for bankruptcy under Chapter 13.) Chapter 7 bankruptcy, on the other hand, usually means a business is over—it closes its locations and a trustee takes over the business to liquidate its assets through an auction. Filing under Chapter 11 and/or Chapter 13 can provide you with protection necessary to push the restart button on your business and give it a fresh start.

Before you file for bankruptcy protection, consider the following advice from Nat Wasserstein, owner of Lindenwood Associated LLC, a business crisis management firm in Upper Nyack, New York:

Restructure Out of Court

Before filing for bankruptcy, do what you can to restructure your business outside of court to prevent filing. Talk to your lender. You may be able to refinance or modify your loan or to arrange a forbearance agreement, or a contract that obligates the lender to temporarily refrain from enforcing existing and anticipated defaults and from going after the borrower’s assets.

If you owe money to vendors, explain your situation and try to arrange a payment plan. Before you meet with them, do your homework. Determine how much you’ve paid them over the years you’ve done business with them. Tell them, for example, that you paid them $1.5 million over the last 20 years, and they may never see the $60,000 you owe them if your company files for bankruptcy. “Once they see the downside is huge, they’ll be willing to negotiate,” Wasserstein says.

Consider Cost and Risks

Bankruptcy is expensive. In addition to a filing fee, you’ll also have to pay lawyers’ fees—and that could be as much as $50,000 to $150,000, Wasserstein says. And don’t forget that filing for bankruptcy means you may lose business and compromise relationships with customers, suppliers and vendors. Suppliers might not want to agree your terms. Customers might not want to do business with a company that could shut its doors in the near future, or buy products that have a warranty that may not be good down the road. 

Make sure you have as much cash on hand as possible before filing for bankruptcy. “You don’t want to run into a situation where you’re administratively insolvent,” Wasserstein says, meaning you can’t pay for bankruptcy. 

Consider Personal Bankruptcy Protection

If your home, taxes and personal finances are being deeply affected, you might want to consider filing for personal bankruptcy protection under Chapter 13 (in addition to Chapter 7 or Chapter 11 bankruptcy) to protect your assets. Many SBA loans, for example, have a personal guarantee that allows lenders to go after the business owner’s home and other assets in the event of insolvency. Chapter 13 can prevent lenders from acting against you.

Of course, you should consult an attorney to see what your options are and what type of bankruptcy protection makes the most sense for your business. While bankruptcy comes with a stigma, it can also be used as a tool to fix the balance sheet up, Wasserstein says.

Read next: Bankruptcy 101: What Your Business Should Know

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