Facing Hard Economic TimesPosted August 21, 2012 by in Articles & Publications
The news this fall has been filled with reports of large, well-established companies facing difficult economic circumstances. In a number of highly publicized cases, the federal government (using our tax dollars) has ridden to the rescue. Such relief is unlikely to be granted to the rest of us. That being the case, it is important for you to evaluate how your business will face the economic slow down and what, if any precautionary steps you can take.
Have You Carefully Evaluated Your Business' Situation?
Before you can know what defensive steps you can take to protect your business, you must realistically evaluate your current business operations. Consult with your CPA or other financial advisor so that you can decide: Where are the weak spots? What is costing too much? What activity can you discontinue because it is not part of your core purpose?
With this information, develop an action plan for how you will respond to what you have discovered. Some steps may be totally within your control to undertake. However, other steps may require the "cooperation" of your creditors.
What Are Your Options?
Seeking to revise existing contracts is, of course, highly problematic. Moreover, you may find yourself on the receiving end of such requests from your own customers and clients. It behooves you to consider how you will respond to such overtures as well as to consider what efforts you will take to enforce overdue payments.
Given the reality of our economic times, it may be to your advantage to see whether adjustments can be worked out with your creditors, such as your landlord, banker, and equipment supplier. This requires a delicate approach. It is best if you know exactly what relief you need, as it is unlikely you will be able to make repeated requests.
Can Bankruptcy Give You Positive Relief?
If you can "plan" for a business related bankruptcy, it is more likely to prove successful in saving your business than if you wait until the last moment when all of your financial resources are gone. Useful planning requires having knowledge. The knowledge you need is twofold. First, what is the current economic situation of your business and its near-term prognosis should you obtain relief? Second, what are you required to do when you proceed in bankruptcy? You should consult with advisors to acquire both kinds of knowledge.
What Bankruptcy Options Are There?
In the case of legal entities, such as corporations and limited liability companies, Chapter 7 bankruptcy involves the liquidation of the assets of the underlying business as well as the entity's termination. If your business is under great stress and you have exhausted its resources, then this may be the best answer.
Alternatively, if, as the owner of the business entity, you have personally guaranteed debt for your business, you may be eligible to take the Chapter 7 route as an individual, eliminating your personal debt. Provided your creditors would prefer for your business to continue to function, such as the landlord who wants to have occupied rather than empty space, you may be in a better position to get their cooperation in reworking the business' contractual obligations.
Keep in mind that in 2005, Congress enacted changes to the Bankruptcy Law making it harder for individuals to qualify for Chapter 7 relief. If you have income above a certain level, then you may need to explore whether a Chapter 13 can give you any leeway in your negotiations with the business' creditors.
Only human beings are eligible for Chapter 13 bankruptcies. Such a bankruptcy is a highly formalized version of a reorganization. Typically, the Chapter 13 bankruptcy is used by individuals who are employed, have assets and who owe more than they can pay. Unless you are able to show how your business will generate the revenue to pay you to fund the plan of repayment, you will not qualify for this kind of relief.
Chapter 11 bankruptcies are for businesses that are facing economic distress but which have not exhausted all of their resources. The objective is to reorganize the business and its relationship with its creditors. However, Chapter 11 bankruptcies are more complicated than either Chapter 7 or 13 bankruptcies and are considerably more expensive. Therefore, unless your business has resources which can be tapped not only to pay for the professional services you will need but also realistically to craft a plan of repayment, such an effort is likely to be doomed.
What Is the Bottom Line?
The point of this article is not to give easy answers since there are none. Rather, it is to encourage business owners not to shy away from unpleasant facts. In these troubled times, periodic proactive evaluation of where your business stands will be your best defense against the big bad wolves that may be howling at the door.