Business bankruptcy is a dangerous illusion. Contrary to popular belief, it often doesn’t protect the business or the individual’s personal assets.
Far too many companies fall victim to this misconception—with devastating results. Compounded by the pervasive false narrative regarding “fresh starts” and “second chances,” people are led to the destruction of their own livelihoods and dreams like lemmings off a cliff.
If you are considering bankruptcy, here are the six myths that can make the difference between the financial life and death of your business.
It’s not all gloom and doom, however. We’ll show you a better way out of your financial distress. Read on.
1. Bankruptcy offers me a clean slate.
Think bankruptcy will ease your debt burden? Think again.
Here’s the truth: in Chapter 11 bankruptcy, you still repay 100% of your debt over a period of five years, almost without exception. This means you get no actual debt reduction but your business credit gets destroyed nonetheless. Furthermore, things will get a lot worse if the plan falls apart–which will very likely happen (keep reading). Even Chapter 7 can leave a lien on your home and a flood of unresolved legal and financial issues.
2. Bankruptcy will keep things from getting worse.
Bankruptcy isn’t a safety net; it’s a money pit.
If you are even considering bankruptcy, you are probably all too familiar with the costliness of lawyers and legal proceedings. On top of paying back 100% of your debt, you’ll need to add the exorbitant legal costs necessary to prepare the plan. From there, objections from creditors will inevitably arise, and every single issue becomes its own legal proceeding that must be resolved before your main bankruptcy case can proceed. Add the cost of a lawsuit to each and every objection that arises, and your legal fees grow exponentially.
3. At least I’ll get my life back.
You won’t have control.
Your life will quickly spiral into chaos as you lose control to Trustees, the Judge, and opposing creditors. Any and all of them can create innumerable delays to your plan with endless objections and other obstacles. With so much time and money at stake, you’ll have absolutely no leverage or control over the process and will be at the mercy of the system, while your funds are bled dry trying to hold the plan together.
4. At least my home and personal assets are protected. I’ll be okay when it’s all over.
Chapter 11 won’t necessarily protect your personal assets.
This is the most dangerous myth of all. Here’s why. Most people thinking about Chapter 11 bankruptcy believe there’s a firewall between the business and their personal assets. What you aren’t told is how high the risk of conversion is to Chapter 7. So now, after being drained financially and emotionally, your business is shut down and all of your assets are liquidated. You risk the loss of everything for which you have a personal guarantee, and such guarantees are a universal requirement set forth by today’s industry norms.
5. Bankruptcy failures are rare.
Chapter 11 failures are the rule, not the exception.
Chapter 11 bankruptcies fail an astounding 75 percent of the time. This high failure rate is due to multiple factors. For example, creditors can raise objections to the plan as it is set forth, creating supplemental lawsuits and adding additional legal fees to an already overtaxed business entity. In addition, the committee of trustees and examiners assigned to your case may conclude your cash flow is insufficient to repay the debt, even with the longer payment terms. So if you file Chapter 11, there’s really only a 25 percent chance you’ll get to hold onto the business you built, and after the huge financial and emotional toll the process takes, this could leave you worse off than had you done nothing.
6. I can’t pay my debt. I have no other choice.
Bankruptcy is not your only option. It is just your worst option.
A reputable third party like Second Wind Consultants that specializes in debt workout and corporate restructuring can be a lifeline for companies in distress. Lawyers won’t tell you that bankruptcy is rarely in your best interest, and as a result, many business owners don’t realize that there is “a better way” out. There’s no reason to risk destroying the company you created or the jobs that depend on its success. Second Wind can provide business strategies for avoiding the financial and emotional devastation and put you back on the path to success. Find out more and set up your free consultation today.