When Business Fails, Filing for Bankruptcy - WSJ.com

When Business Fails, Filing for Bankruptcy - WSJ.com

* JULY 26, 2010, 9:44 A.M. ET

By COLLEEN DEBAISE

Adapted from THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press).

My business, in operation for more than eight years, has been slow lately. There is little cash flow and debts are past due. Unsecured credit cards and business lines are up to their limits. Basically, we can't afford to pay our bills. Will I be held personally liable for the debts and liabilities of the company? Will this affect my personal credit? What are the consequences of filing bankruptcy?

These questions that I received from a reader illustrate probably the most painful position that you can find yourself in as a business owner: Not only has business ground to a halt, but you're deeply in debt, too.

Your first course of action, of course, is to try some of the cash-crunch strategies outlined in last week's tip (see related article, "Tips for Dealing with Cash Crunches"). If creditors are circling, you may want to consider using the services of a debtturnaround firm. While they charge a fee, turnaround specialists can help get creditors off your back and assist you in liquidating inventory, selling parts of a business (if applicable) and cutting staff.
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The alternatives aren't pretty. Can you be held personally liable for debts and liabilities of your company? Most likely yes. Credit-card companies, for instance, typically issue cards (even business credit cards) based on the owner's personal credit and require the owner to assume personal liability.

As for bankruptcy, it's painful, messy, expensive—and generally should only be used when all other options have been exhausted. Consult an attorney familiar with small-business bankruptcies to figure out whether this is the best choice for you and which direction to take. In some cases, it might make sense to file separate bankruptcy cases—one for the business and one for yourself as an individual.

The two most commonly used business bankruptcy proceedings are Chapter 7 and Chapter 11. If you've decided to shut your doors forever, you might consider a Chapter 7 filing, in which you turn your business over to a court-appointed trustee, who will then sell the assets and distribute the cash to your creditors.

If you're hopeful that you may survive this downturn, at least enough to have a business left to sell, you might consider seeking Chapter 11 bankruptcy protection. When you file this type of petition, you come up with a reorganization plan (under the direction of a court-appointed trustee) to repay outstanding debts and continue to operate as a business. In most cases, unless you have personal means, you'll need to obtain debtor-in-possession (DIP) financing to keep the business afloat while in bankruptcy court.

In recent years, with credit tight, many struggling businesses have been unable to file for Chapter 11 because they can't obtain DIP financing. In general, it certainly isn't easy to salvage a business through a Chapter 11 filing, and many business owners who try wind up converting to a Chapter 7 liquidation.

Write to Colleen DeBaise at colleen.debaise@wsj.com