Business Bankruptcy Is Not The Way To Go

I have recently talked to a few business owners who, for some reason, were advised to file business bankruptcies as opposed to personal bankruptcies. Now, having done this, they have lost their business and all the personally guaranteed debt falls on their personal shoulders to resolve. Ouch.

What was to be gained by this strategy? I asked repeatedly and the only answer I could get was, “The bankruptcy attorney told me this was the way to go.”

Obviously, every fact pattern has its own twists and turns and I am not making a legal judgment and will leave that for the lawyers. I am not in a position to cast judgment on the quality of these decisions, however, I still question what could possibly have been gained with such a strategy?

I believe that the small business owner confronted by massive, crushing, unaffordable debt and dramatically decreasing revenues is very reluctant to file for bankruptcy protection because of the negative stigma and the potential credit score destruction. Therefore, they absolutely prefer not to file personally. Somehow, while still very reluctant to do so, they find a business bankruptcy more acceptable while still very distasteful.

I suspect the bankruptcy attorneys representing these small business owners I have been speaking with simply gave the clients what they wanted and asked for. Since the clients expressed their resistance to personal bankruptcy “unless absolutely unavoidable and necessary” they’ve chosen business bankruptcy to somehow solve the problem but it infrequently if ever succeeds.

This strategy is most often self-destructive as the end results are that the business gets liquidated in the due course of the administration of the case by a steady drain of payments required to the secured parties, the taxing authorities, the lawyers, the court-appointed trustee and the significant downsizing requirements put on you as a result of the courts need to withdraw as much capital as it can for the benefit of the creditors and expenses. In the end, a business bankruptcy filing is almost always terminated in a conversion to a Chapter 7 – total liquidation – and that is the end of the business but not the personally guaranteed debt. The debt remains, landing squarely on the shoulders of the guarantors – the business owners who’ve just lost their business.

What next? A personal bankruptcy? Probably. So, this plan does not sound so good after all, does it? Total loss and no escape and you get to pay for this wonderful trip! Especially since there are so many alternative business strategies that will result in far more successful results and personal safety.

If the facts around your situation support a bankruptcy strategy, then do it. However, in my opinion, the business bankruptcy first is not a very good strategy and should be avoided at all costs. If you have to escape debt there are excellent workout strategies available which will provide you with much better results.

Call me. We can discuss appropriate strategies for you and your business and none of them will involve bankruptcy.