Five Items to Consider Before Filing a Chapter 11 Business Bankruptcy

When to file business bankruptcy is a question that many small business owners struggle with. Corporations, limited liability companies (LLC) and partnerships are legal entities that remain separate from the shareholders. When they are unable to meet their financial obligations in paying off creditors, they can choose to file either a Chapter 7 or Chapter 11 bankruptcy.

Bankruptcy for Business Owners

Both individuals and businesses can file for Chapter 7, liquidation bankruptcy to discharge any unsecured debts. However, the new laws that were passed in 2005 require petitioners to pass a means test to determine their eligibility. If their income is greater than the average median, they may not qualify for Chapter 7 and be relegated to filing for a reorganization of their debts.

Alternatives to Filing Chapter 11

Small business owners who don’t wish to give up their company may choose to file Chapter 11. Before making this monumental decision, there are some alternatives to be considered:

• Restructuring the Business—Many first-time business owners are not familiar with how to handle expenditures vs. cash flow coming in. Before leaping into a bankruptcy petition, they should take a close look at the books. For example, Mary runs a fitness center where women come to work out and get in shape. Her business provides towels to the guests, which are obtained through a laundry service. The service charges large fees in providing this service. A smart alternative would be for Mary to purchase a washer and dryer unit, albeit a small non-expensive model, to do her own laundry. The cost savings to the business could be huge.

• Finding New Vendors—Small business owners may not realize there are many vendors offering the same products and/or services in which the costs can vary considerably. Let’s say that you are running a restaurant and need both food and non-food supplies. In order to save time, the owner shops at a local restaurant supply chain to purchase goods. However, their cost for non-food items is extremely high. The business owner may save money by shopping at a warehouse chain to buy toilet paper, tissues and napkins, even though it requires an extra trip.

• Obtaining a Personal Loan—All banks charge interest for loans and business owners may end up paying more than the loan is worth. Consider asking friends or family for a short-term loan in order to turn around a failing business.

• Hiring a Consultant—Sometimes people enter into a business they know little about. When it begins to fail, they may be ready to throw in the towel. You are not the first one to invent the wheel and asking for help from a qualified professional may be the answer. People that have run similar businesses before you may have advice on how you can prosper in the future.

• Utilizing Volunteers—There are many organizations who use volunteer labor or interns to help their business succeed. These are unpaid workers who actually get something out of helping your business. Maybe they need the work experience or a nice item on their resume for future employers. Whatever the reason, using these individuals can become a huge asset without draining the corporate assets.

Why Seek Legal Advice?

Well, owning a business is no small task and in some cases requires a 24-hour commitment. The upside is that you don’t have some boss barking orders at you, but the downside is that you must be responsible for the success or failure of your dream. Before giving all of that up, you should consult with a bankruptcy attorney to weigh your options.