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When bankruptcy looms
Dear Small Biz Adviser
I have a small clothing company, and I have been losing money in
the last three years. I charged my credit cards to the max, and
now I have a credit card debt of $50,000. I also have loans and
line-of-credit debt totaling $100,000. So in all, I am in debt for
$150,000. Right now I am paying the minimums on credit cards, and
I am paying a lot of interest on the loans and credit cards -- around
$1,500 a month.
Right now my business is making money, but it all
goes to paying the interest and other bank charges. Do you think
it is a good idea to declare bankruptcy? Also, please consider that
I have a corporation, but I am the only shareholder. Do I have to
declare bankruptcy for my company or myself? Or does it matter?
Since I am the only person in my corporation, if I
decide to declare bankruptcy (chapter 11 or even 7), can the court
get my personal assets, such as my car or retirement account? Please
explain what a business and individual has to do in my situation.
All the money I make running my business goes to interest payments
for the loans and my credit cards.
Help!
Kevin
Dear Kevin:
It has been quite a while since I received inquiries entertaining
bankruptcy. However, with the word "recession" now on
front pages, unemployment filings rising and layoff reports topping
news programs, I strongly suspect your inquiry will be repeated
more often in the coming months.
To begin, let us consider alternatives to bankruptcy.
Recently, we dealt with another reader's consideration of business
loan consolidation. Review it to assess the advantages and whether
this may be an alternative to reducing cash flow out of the accounts.
Earlier this year, I suggested some support
agencies that might be able to help a business owner decide
courses of action to take instead of bankruptcy. The possibilities
include selling the business or liquidating assets to pay off liabilities.
If you decide neither loan consolidation nor other
debt-management is appropriate, here are the available forms of
bankruptcy:
- Chapter 7 bankruptcy
for individuals and married couples allows you to ask the court
to discharge all your debts in exchange for the liquidation of
nonexempt assets.
- Chapter 7 corporate
bankruptcy basically involves the liquidation of all company assets
to pay off all debtors in a prioritized manner. For example, secured
creditors get the proceeds from the sale of assets, which were
collateralized through the indebtedness instrument used to secure
those assets. Unsecured creditors receive proceeds from the sale
of unsecured assets. Rarely do they get a 100 percent return of
outstanding debt from the sale of unsecured assets.
- Chapter 11 corporate
bankruptcy allows reorganization of the business and continued
operation to generate income. In the interim, the creditors and
the company, under the oversight of the judge, attempt to develop
a debt repayment plan.
- Chapter 13 bankruptcy
for individuals and married couples allows you to seek an arrangement
through the court to develop a debt repayment plan based on your
income. You protect your property, but will likely lose a good
credit rating.
In your case, I have concerns regarding protection
of personal assets. The credit cards represent fully one-third of
your debt. If those are personal credit cards, you may have some
problems. If you seek to eliminate personal credit card debt in
the process of filing Chapter 7 or 11 corporate bankruptcy, that
simply will not happen.
Finally, I must ask: Why did you wait so long to find
alternative solutions to bankruptcy? You indicate these problems
have been growing over the last three years. Why did you not:
- Examine your expenses to find ways to reduce operating
overhead without compromising quality of product?
- Determine if you could increase your prices without
compromising profit margins?
- Consider selling other items, closely aligned to
what you now sell, to increase sales and gross profit?
- Take a closer look to see if existing or new competition
was entering your market? If so, you could have taken appropriate
actions to prevent any lost sales.
- Consider selling the business (or filing for bankruptcy
earlier) before accumulating more debt?
Review all alternatives and get some professional
help now, including the advice of a bankruptcy lawyer.
I sincerely wish you well in whatever decision you
make.
-- Posted: Aug. 23, 2001
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