How Do I Save My Business? Bankruptcy Considerations for Business Owners

Saving a business is a complicated undertaking. This is a situation where you definitely need to consult a professional.

To evaluate the options, you must take into account the same general factors used in considering a filing for an individual but, in addition, facts specific to businesses, including:

  • Is the business worth saving?
    • This is fundamental. For many small businesses, the real value exists only in the knowledge and skills of the principals. The substantial effort and expense of a business reorganization case just may not be worth it compared to what can be achieved. On the other hand if valuable assets – such as a valuable building, lease, contracts, licenses, etc. – are titled to, and hence property of, the business, then maybe the reorganization options of Chapter 11 and 13 do need to be examined. Business liquidation in Chapter 7 bankruptcy does not end with a discharge of the business’s debts. However, through a court–supervised liquidation of the business, a “period” is put on the end of that chapter in the business’s life so that the principal, although not liable on the entity’s debts, will not be burdened with having to respond to the entity’s lawsuits, inquiries from creditors, etc.
  • How do you plan to save the business?
    • Too often businesspersons come to the bankruptcy attorney on the eve of a foreclosure, eviction, or other creditor enforcement action that will significantly disrupt, if not completely terminate, business operations. The principals want immediate bankruptcy court protection, but have no real plan to put the business back on its feet. Worse yet, in many cases, the business does not even have up–to–date profit–and–loss statements and other financial information to make an informed decision as to how a rescue could be effected. Because such filings merely serve to delay and thereby damage creditors, the US Trustee’s Office, a key player overseeing Chapter 11 cases, will meet with the principals early in the case and question them pointedly to see if they have even a chance at a viable, confirmable plan. Talk to an attorney early and begin to formulate plans before the crisis.
  • Based on your financials, what is the cause, or causes, of the financial distress?
    • Assuming there are current financials for the business, the situation must be evaluated to determine what needs to be done to put the business back on track. Reorganization bankruptcy can give you options such as cure a default on secured debt to be able to keep important collateral needed for operation of the business, assume or reject beneficial or onerous leases or contracts, discharge unsecured debt, pay overdue income, property, employment or other types of taxes – all while under the protection of the bankruptcy court.
  • What is the best way to proceed?
    • A business can be restructured in a voluntary, out–of–court “work out.” But since the debtor and the creditors know that bankruptcy is in the background should talks fail, most agreements will be negotiated with an eye to what each could achieve in bankruptcy anyway. Hence, the filing may as well be prepared, and used as the operative document from which to try to negotiate an out–of–court settlement. If the case must be filed, there may be an option under which chapter to file and a weighing of the relative pros and cons. In most cases, the only option for business reorganization will be Chapter 11, if the business exists as a separate entity such as a corporation or limited liability company. Otherwise, if the business is a sole proprietorship and the debts are under maximums set by the bankruptcy code, a cheaper and faster reorganization could be effected under Chapter 13. Only in very rare cases in this area (DC, northern Virginia and suburban Maryland), could a debtor qualify as a “family farmer or fisherman” for reorganization under Chapter 12. Besides reorganization of the business, there could be other options that could be more advantageous depending on the situation, goals and preferences of the principals, such as a formal sale of the business, an orderly liquidation, or simple abandonment of the business.