Chapter 11 Bankruptcy can Eliminate your Customers

Every business owner needs to think twice before deciding to file bankruptcy in an attempt to deal with their company’s creditor issues.   Many times your own attorney will suggest that you consult with either their own bankruptcy counsel or an attorney from another firm who files business bankruptcy.  Of course exploring all available options when coping with business creditor problems is a good idea, but there are many other approaches to resolving your company’s debt problems while keeping your business in tact and your customers from abandoning ship.

The different types of business bankruptcy

There are basically four types of bankruptcy that are used to deal with business debt problems.

The first is a Chapter 7.  This form of bankruptcy involves the complete liquidation of business assets by the bankruptcy trustee which is then used to pay the creditors in an order set-forth in accordance with bankruptcy rules and laws.  While Chapter 7 is also often used by individuals seeking discharge from their personal debts, it is also used by individuals who have operated their businesses as a sole proprietor as well as by corporations and partnerships.

Second is a Chapter 11.  This type of bankruptcy is used for individuals, corporations and partnerships and has no limits as to the amount of debt involved.   It is the typical choice for businesses seeking to restructure their debt in hopes of saving their business.  In this legal proceeding, the company receives immediate protection called a “stay” from creditors taking action against company assets to satisfy their claims.  The business then attempts to devise a written plan whereby the company pays your creditors off over time.  Once the plan is approved by the creditors and the court, the company emerges from bankruptcy.

Next, there is a Chapter 12.  This is similar to a Chapter 11 but is designed specifically for the reorganization of family farms.  A family farmer may be conducting business as an individual,  corporation,  or partnership, but there are limitations as to the amount of debt involved.

And lastly is Chapter 13.   While Chapter 13 can’t be used by corporations or partnership to reorganize their debt (that is what a Chapter 11 is for) it can be used by small business owners who have operated their businesses as a sole proprietor.  This involves filing a Chapter 13 in the individual’s name then including all the business debt which they are personally liable for.

The success rate of businesses who choose to file Chapter 11 Bankruptcy

Unfortunately, many small businesses who choose to file Chapter 11 bankruptcy end up being liquidated.  This is because reorganization in bankruptcy primarily concerns itself with the resolution of business debt issues rather than how the company got into trouble in the first place.  Consequently, a business many times continues to lose money right up until the bankruptcy trustee asks the court to convert the proceeding to a Chapter 7. Once Chapter 7 is approved, the trustee closes down the business and liquidates all the assets.

Another reason for such a low success rate is that smaller businesses can’t afford the extensive cost of the bankruptcy process itself.  Despite the fact that the filing fees and the initial cash retainer to the bankruptcy attorney are often times considerable, the appraisers, accountants, consultants, lawyers and others involved in the process will demand tens of thousands of dollars from the cash strapped business which is desperately trying to squeeze out a profit just to stay one step ahead of being liquidated.

Why your customers will be concerned

Despite the fact that attempting to reorganize a small business in Chapter 11 often fails, there’s other challenges that will contribute to the likelihood of failure.  That is your customers leaving during the Chapter 11 reorganization process.  Here is why.

Most professional buyers employed by companies who purchase your products and services know the dismal success rate that a business faces when they chose to file bankruptcy protection.  While your customers perhaps will assure you that they will stick by your side while you attempt to reorganize your business through the bankruptcy process, you can bet they are very concerned and behind the scenes have started to look elsewhere just to cover themselves.  You know they cannot afford to take the risk of one day at work finding out that you are no longer in business resulting in their inability to supply their own customers.  Unfortunately, buyers will not take that risk and will be getting a new financially stable supplier up and running in secret.

What are your other options

While company owners who want to stay in business many times choose the route of Chapter 11 bankruptcy, they quickly find out that the costs are substantial, the risks of liquidation are high, and their customers slowly start going elsewhere.  Once customers start to leave, sales plummet and business owners in Chapter 11 bankruptcy finds himself quickly out of business.

But there are many other methods available to resolve business debt problems – without all of the risks associated with Chapter 11 bankruptcy – regardless if these issues involve an unhappy banker, unpaid payroll taxes or creditor problems. This can all be accomplished without your customers knowing what you are doing behind the scene to resolve your business problems.  Your customers continue buying your products or services as if nothing had happen.   Contact the Turnaround Group to find out how we can help your business stay in business.

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