Many people think that when a business files for bankruptcy it has failed. That’s a myth. A large majority of the companies that file for bankruptcy plan to keep operating. They want to be profitable again. The Bankruptcy Code has procedures and protections that allow companies to reorganize their finances and stay in business. Many of these tools, such as being able to obtain loans while in bankruptcy, are only available to companies that are reorganizing in bankruptcy. Sometimes filing for bankruptcy turns out to be one of the best decisions an owner can make.
However, not every business can be saved through reorganization. Deciding if yours is one of them is not a simple process. If you are considering a bankruptcy reorganization to save your company, here are two basic questions to consider to start with.
Going-concern Value
First, is the business generating revenue, or does it have a good shot at making it in the near future? A company’s going-concern value is how much the business is worth if it remains in operation. That is what reorganization is trying to preserve: the business. Compare the cost of keeping this business going with the cost of simply closing it and opening an identical one. If keeping the company in business gets the owners nothing, then saving it may be a waste of money. Sometimes closing the business and starting another like it is a better deal. It might also make little sense to file bankruptcy for a company that isn’t producing revenue and doesn’t have prospects for doing it soon. But the company doesn’t necessarily have to be bringing in dollars as of now. It merely needs a good possibility of doing so in the foreseeable future.
Note that struggling companies often have some revenue potential left. This can come from some under-appreciated asset, like a big customer list that has been poorly marketed to. Or the business may have been damaged by some temporary problem, like road construction that has been hurting the bottom line but is expected to be done by a certain date. Reorganization buys time to work through these issues.
The Business’s Debts and Contracts
Second question: are the business’s debts and contracts what keep it from making money? If what is keeping it from being profitable is a debt, maybe getting rid of that obligation would get the business over the top. But some costs, like wages and utilities, cannot be avoided if you hope to stay in business. These costs often grow as the company does. The business will need some minimum number of employees, so labor costs have a floor you can’t go below. Employees also have to be paid the going rate for the area.
OK, so you can’t do without labor and utilities. But there are tons of things that just hold you back: long term contracts signed in desperation that are crippling, robbing your company of every last penny of profit. Some debts aren’t required by your business, they’re anchors weighing it down. A startup could overpay a supplier for a long-term contract it had no leverage to negotiate, only to find itself overpaying for garbage that doesn’t sell. If you entered into a long term deal when you didn’t know what you are doing, reorganizing the finances may enable you to reject these burdens.
A loan for an expensive piece of equipment or real estate is another thing that can choke a business to death. If the payments are hurting your cash flow, lenders often will not renegotiate. And if losing that asset means you can’t operate anymore, then you risk losing everything. In bankruptcy, you can sometimes renegotiate the repayment terms of a secured loan even if the lender won’t do it willingly.
Visit a Bankruptcy Attorney
But these are just a couple of the possible ways bankruptcy could help a company that is in financial trouble. Visit a bankruptcy attorney at the first signs of financial troubles. Even if bankruptcy isn’t the solution, a knowledgeable bankruptcy lawyer has the experience to provide other, nonbankruptcy solutions. And whether you’re deciding if bankruptcy is a good fit or planning for it, it’s a lot better to do it with the help of an attorney who knows where the pitfalls and boobytraps are.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
