Navigating the Bankruptcy Process

It might be easier than ever to start a small business, but that doesn’t mean the process of growing a small operation into a successful, profitable business is a walk in the park. Instead, many have ended up navigating the bankruptcy process.

There are many challenges that arise. For example, low barriers to entry have created increased competition, which has ultimately made it more challenging for any company – let alone a brand new company without brand equity or market proof – to survive. T

Want the sobering truth? Most small businesses fail. According to data published by the Bureau of Labor Statistics’ Business Employment Dynamics, the survival rate looks like this:

• 80 percent of businesses with employees survive their first full year of business.
• 66 percent of businesses with employees survive their first two years in business.
• 50 percent of businesses with employees survive for five years.
• 30 percent of businesses with employees will make it to their 10^th

These statistics shouldn’t hold you back from investing everything you have into your business, but they should provide you with a practical outlook. If you’re going to launch a business, you have to know that failure is a possibility. And if failure is a possibility, then it would make sense to study bankruptcy, the options that exist, and how they can and should be used when causal factors necessitate movement in this direction.

When Should Bankruptcy be Considered? 

The first thing you have to look at is the worst-case scenario when navigating the bankruptcy process. If your business is buried in debt and unable to move in a positive direction, what’s the worst that can happen? The answer to this question largely depends on the type of organization you have setup.

“If only a limited-liability business entity were suffering financial trouble, the best thing to do is just close the doors and walk away,” small business attorney Michael J. Duffy says. “There’s no need to go through any bankruptcy process if the only recourse is against the business.”

Recourse is the number one reason why Duffy and other attorneys commonly recommend that business owners organize their enterprises as corporations or LLCs. Unless you improperly co-mingle personal and business finances, these types of entities provide protection and keep creditors from coming after your personal assets.

But if you want to keep the business alive, bankruptcy could be the best option for moving on.

Businesses can find themselves in a bankruptcy situation as a result of any number of factors. Sometimes it’s simply the result of having a product or service that the market doesn’t value.

Other times, it comes down to poor management, a lack of good leadership, improper finances, or a flawed business strategy. Whatever the case may be, it’s important that you’re honest with yourself, recognizing when it is time to start navigating the bankruptcy process.

Options for Navigating the Bankruptcy Process

People throw the word “bankruptcy” around a lot, but it’s not an all-encompassing term. There are a number of different types of bankruptcy and each has its own pros, cons, and applications.

There are three major ways of navigating the bankruptcy process:

1. Chapter 7 

“Chapter 7 is a bankruptcy option for debtors that do not have the means to restructure their obligations and continue in business,” attorney Cara O’Neill points out. “In Chapter 7, a trustee is appointed, available assets are sold, and creditors are paid to the extent funds are available.”

Chapter 7 is an option for partnerships, LLCs, and corporations. If you’re a sole proprietor, you can also file for Chapter 7, but it doesn’t eliminate any of the personal obligations you may have in connection with the company’s debt.

Business owners often prefer Chapter 7 when they want to close their business and prefer not to deal with the painstaking process of selling assets and negotiating with individual creditors. However, because of certain exemptions, it is possible to remain in business after filing for Chapter 7.

2. Chapter 11 

While most Chapter 7 bankruptcies coincide with the termination of the business, Chapter 11 is pursued when the business owner simply wants to reorganize and stay in business.

When you file for Chapter 11 – which is available to sole proprietorships, partnerships, and corporations – you’re able to protect assets from creditors. Under the oversight of a court-appointed trustee, you’re given a relief period where debt payments are reduced and you have the ability to reorganize.

The biggest issue with Chapter 11 is that it’s time-consuming and expensive. It’s not something you can casually utilize. It only makes sense if you think the company has a realistic opportunity to turn things around.

3. Chapter 13

Then there’s Chapter 13, which is a restructuring option that’s only open to individuals (sole proprietorships). Businesses that operate under a partnership, corporation, or LLC can’t file for Chapter 13. There are also debt limitations. As O’Neill notes, “As of April 2016, an individual owing more than $394,725 in unsecured debt or $1,184,200 in secured debt cannot file Chapter 13.”

Chapter 13 is typically used by small business owners who have considerable personal assets and/or those who don’t qualify for Chapter 7. One of the more attractive features is that no assets are sold. You simply have to demonstrate that you have the financial means to repay a portion of your debts. This often allows business owners to experience fewer long-term ramifications after the bankruptcy process concludes.

4 Things to Know About Navigating the Bankruptcy Process 

“There’s an old saying: the more time you spend preparing for bankruptcy, the less time you’ll spend in bankruptcy,” says Erik White of Bridgepoint Consulting. “Starting with a good strategy in hand will help push the process forward effectively. It will also convey your seriousness and sense of urgency to important stakeholders: the court, your creditors and key suppliers.”

If you’re on the verge of navigating the bankruptcy process or considering the possibility as you analyze the future of your business, here are some things you need to know and prepare for.

1. Think About the Purpose 

The most important part of the bankruptcy process is determining the outcome you hope to achieve. Are you trying to reduce debt? Get rid of burdensome contracts? Sell the business? Restructure the business? Depending on your goals, the bankruptcy process could look very different. If you don’t have clarity here, you’ll find yourself running in circles.

2. Have a Communications Strategy

Communication with stakeholders is probably the most underrated aspect of the bankruptcy process – especially if you’re planning on staying in business. Specifically, you need to be open and transparent with employees.

Naturally, your employees are going to have concerns when you file for bankruptcy. It puts their job status and financial security at risk and leaves them in an uncertain and uncomfortable position – often for months on end. Keeping them updated and being honest about likely outcomes will go a long way towards forging trust.

It’s also important that you have an external communications strategy in place. To a degree, you need to control the message heard by creditors, clients, and others in the marketplace. You don’t want to lie, but you should safeguard your business as much as possible during this tumultuous period.

3. Think About Next Steps

You need to be patient throughout the bankruptcy process. Take things slow and listen to your counsel as they guide you through significant decisions you’ll need to make. The bureaucratic nature of bankruptcy courts often means it takes months for little decisions to be made. Rushing to conclusions won’t do you or your business any good.

Having said all of this, it’s wise to take a peek at the future and think about what’s coming down the line. You might start the bankruptcy process thinking you want to remain in business, but ultimately realize that closing up shop is the best plan of action. Think about these things and be flexible as the situation unfolds.

4. Learn From Your Mistakes

Bankruptcy can be painful. However, if you let it shape you in a positive manner, then you’ll be better for the experience. If nothing else, bankruptcy teaches you about mistakes and the severe consequences that can result from them. Use these as teaching opportunities and look for ways to improve your management, leadership, and fiscal responsibility in the future.

Let This Be a Turning Point 

Do you know what names like Abraham Lincoln, Henry Ford, Walt Disney, Donald Trump, George Foreman, and Larry King have in common? They all went bankrupt at one point in their lives and then went on to have major success. 

When you hear people use the word bankruptcy, you probably think about financial ruin and failure. And, while bankruptcy is never something you want to go through – personally or professionally – it doesn’t have to spell the end for you. In fact, you can navigate the bankruptcy process and become successful once again.

The purpose of bankruptcy is to provide relief and closure. From a debtor’s perspective, it allows for a fresh start. Let this be a turning point for you and your business and don’t squander the opportunity to learn and grow.