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What to Know Before Advising Your Client to File Bankruptcy

Article | April 6, 2019

Six Bankruptcy Myths that Can Cost Your Client Everything

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 business owners 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 your client is considering bankruptcy, here are the six myths that can make the difference between the financial life and death of her business.

1. Bankruptcy offers your client a clean slate.

Think bankruptcy will ease your client’s debt burden?  Think again.

Here’s the truth: in Chapter 11 bankruptcy, your client still repays 100% of his debt over a period of five years, almost without exception. This means he gets no actual debt reduction but his 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 client’s 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.

As a trusted advisor, you are all too familiar with the costliness of lawyers and legal proceedings. On top of paying back 100% of her debt, your client will 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 her main bankruptcy case can proceed. Add the cost of a lawsuit to each and every objection that arises, and your client’s legal fees grow exponentially.

3. At least my client will get his life back.

Your client won’t have control.

Your client’s life will quickly spiral into chaos as he loses control to Trustees, the Judge, and opposing creditors. Any and all of them can create innumerable delays to his plan with endless objections and other obstacles. With so much time and money at stake, he’ll have absolutely no leverage or control over the process and will be at the mercy of the system, while his funds are bled dry trying to hold the plan together.

4. At least my client’s home and personal assets are protected. She’ll be okay when it’s all over.

Chapter 11 won’t necessarily protect your client’s 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 they aren’t told is how high the risk of conversion is to Chapter 7. So now, after being drained financially and emotionally, your client’s business is shut down and all of her assets are liquidated. She risks the loss of everything for which she has 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 client’s case may conclude his cash flow is insufficient to repay the debt, even with the longer payment terms. So if he files Chapter 11, there’s really only a 25 percent chance your client will get to hold onto the business he built, and after the huge financial and emotional toll the process takes, this could leave him worse off than had he done nothing.

6. My client can’t pay her debts.  She has no other choice.

Bankruptcy is not your client’s only option. It is just her 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. Bankruptcy is rarely in your client ’s 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 your client created or the jobs that depend on its success. Second Wind can provide business strategies for avoiding the financial and emotional devastation and put your client back on the path to success. Find out more today.


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