By Cliff Ennico
Last week’s column on the new small-business bankruptcy law (known as Subchapter V) generated a ton of email responses, most of which asked for guidance on whether a small business should consider a bankruptcy filing under the new law as opposed to toughing it out and negotiating with creditors.
When it comes to bankruptcy, every situation is unique, and you are best advised to speak to an accountant, financial advisor or bankruptcy attorney to determine whether or not you are so in over your head financially that bankruptcy is the only option.
Having said that, there is some general guidance I can offer.
First, pull together the following information:
• A list of your creditors and how much you owe each of them.
• The amount of debt that is secured by a lien on your business assets.
• The amount of debt that is held by reasonable creditors (banks, commercial landlords and sophisticated investors who are likely to act rationally, not emotionally, and realize that your business is worth more alive than dead).
• The amount of debt you have personally guaranteed (most credit card debt, leases and franchise obligations will fall into this category).
• How much you would get for your business assets if you were to sell them all today at fair market value.
• Your best estimate of your business’s free cash flow (the amount by which your revenue each month exceeds your essential operating expenses and current debt service) over the next six, 12, 18 and 24 months.
Next, pour yourself a drink and consider how burned out you are running this business. Even if your business is salvageable financially, is it worth spending the next three to five years of your life working for your creditors?
When you have this information handy, here are some rules of thumb to help you figure out the best way to proceed with your small business:
Scenario No. 1: You are burned out; you have little debt that is personally guaranteed; and you could pay most, if not all, of your debt by selling your business assets and shutting down.
If you have a corporation or limited liability company, file for voluntary dissolution and liquidate under state law. If you are a sole proprietorship, negotiate with the holders of the debts you have personally guaranteed. If you have only a few creditors and they can be expected to act rationally, consider an assignment for the benefit of creditors under state law (see https://www.nolo.com/legal-encyclopedia/free-books/small-business-book/chapter13-3.html).
Scenario No 2: You are burned out; you have many creditors, both rational and otherwise; and by staying in business and cutting back your living expenses, you could pay most of the debt you have personally guaranteed out of free cash flow in the next six to 12 months.
Painful though it may be, your best bet is to hang in there, stay in business and apply every penny of free cash flow to pay off the debt you have personally guaranteed. Once that is paid off, consider an orderly dissolution under state law or liquidation under Chapter 7 of the Bankruptcy Code.
Scenario No. 3: You are burned out; you have many creditors, both rational and otherwise, including lots of personally guaranteed debt; and there is no way you will be able to pay even a small portion of what you owe over the next six to 12 months.
Your best bet is to liquidate under Chapter 7. You may have to file personal bankruptcy as well if you cannot pay off your personally guaranteed debt within a reasonable amount of time.
Scenario No. 4: You want to stay in business, you have only a few creditors and they can be expected to act rationally.
Your best bet is to negotiate a workout of your debts with each creditor.
Scenario No. 5: You want to stay in business, you have many creditors including some personally guaranteed debt, and you think you can pay 50 percent or more of your debt out of free cash flow over a three- to five-year period. Consider filing for bankruptcy under the new Subchapter V. Put together a reorganization plan providing for the payment of at least 80 percent to 90 percent of what you owe each creditor over a three- to five-year period.
Scenario No. 6: You want to stay in business, you have many creditors including a manageable amount of personally guaranteed debt, but there’s no way you can pay even 50 percent of your debts over the next three to five years.
Time to get tough. Consider filing for bankruptcy under the new Subchapter V with a plan that will cram down most of your existing creditors (force them to accept less than what they are currently owed). Your creditors won’t be happy about this, so be prepared for a fight.
Scenario No. 7: You want to stay in business, you have many creditors including lots of personally guaranteed debt, and there is no way you will be able to pay even a small portion of what you owe over the next three to five years.
You are probably in denial and in need of more than just financial counseling. Re-read scenario No. 3.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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