When Bankruptcy Is a Smart Move

By Susan SchreterBusiness on Main

While declaring bankruptcy might feel like the ultimate failure, it could be the best strategic move for you and your business.

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In the wake of so many high-profile corporate bankruptcies, I started to wonder how smaller companies fared in federal bankruptcy court. Did smaller companies get the same opportunity to reinvent their futures as General Motors?

During the last few months, I’ve talked to more than a dozen business owners who filed for business bankruptcy, as well as attorneys who specialize in advising business owners about federal bankruptcy laws. Their insights were encouraging and enlightening.

Can bankruptcy work in your favor?

The top regret of every business owner I spoke to was procrastination. They wished they had “acted earlier” to learn how they could use bankruptcy filings to their advantage. They were surprised that bankruptcy didn’t mean “defeat” or the end to their business careers. As one woman said, “Once I got my ego out of the way, I was able to view bankruptcy as a powerful strategic weapon for solving a lot of problems.”

Under the federal bankruptcy code, businesses and partnerships have options regarding how and when to file for bankruptcy protection. In short, Chapter 11 bankruptcy filings allow business owners to reorganize their debts while continuing company operations. This usually allows for more flexibility and command of bankruptcy outcomes. With Chapter 7 bankruptcy filings, a bankruptcy trustee is appointed to manage the sale of certain company assets to help retire outstanding debts, often at a deep discount.

Here are ways companies can benefit from a bankruptcy filing:

- Save time and buy time. A bankruptcy filing gives business owners an opportunity to deal with all outstanding creditors in an organized way. Rather than negotiate with all debtors and vendors individually, the court can consolidate decision making in a time-saving way for business owners. A bankruptcy filing also prevents debtors from taking any other legal action against a company. This temporary “stay” can give business owners more time for planning the company’s brighter future.

- Shed debt. The obvious benefit to a well-executed bankruptcy filing is the opportunity to renegotiate or shed certain business debts. Bank loans, equipment or vehicle leases, unprofitable store locations, and onerous contracts — even employment contracts — can all qualify for review under the nation’s bankruptcy laws. While there is no certainty that all of a business owner’s requests for debt relief will be accepted by the bankruptcy court, reducing the cash cost of interest and principal payments can help businesses return to profitability.

- Reinvent company operations. Sometimes it takes a bankruptcy filing to inspire company owners to set higher business standards for their companies’ operations. With a judge’s approval at stake, owners say they were more willing to close down unprofitable operations, stop serving deadbeat customers, and set stricter benchmarks to rate employee performance. One business owner said, “Once I got rid of all the bad stuff, the remaining good stuff was easier to build on.”

- Appeal to new investors. Most owners of financially strapped businesses aggressively pursued investors prior to their bankruptcy filings. What they learned is this: Wealthy “angel” and venture-capital-fund investors don’t like to pay off old business debts, especially bank loans. Investors want their funds allocated to activities that enhance the company’s future value, such as product development, intellectual property filings, or joint ventures.

Post-bankruptcy, entrepreneurs can appeal to investors with a clean slate for business growth. Sometimes clever business owners can line up investors to purchase a company’s assets and place them in an entirely new business entity, with existing management still at the helm.

- Restore self-confidence. Perhaps the greatest upside for business owners who shepherd their companies through a bankruptcy process is empowerment. They faced a new challenge head on and persevered. One business owner told me that prior to the bankruptcy filing, he became paralyzed by fear — not by his company’s problems. He credits the bankruptcy process, which he found intellectually interesting, as a way to re-engage and “get fired up to succeed again.” He also added that all his worst fears of customer defection and professional ridicule never happened.

Here’s one last tip. The key to productive bankruptcies is hiring highly experienced attorneys who are not so overloaded with other work that they miss key filing deadlines. It’s your job to hire your professional team and lead your company to greatness once again. Hershey Company founder Milton Hershey did it, and so can you.

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