Thursday, May 24, 2007

Say No to Business Bankruptcy

When your business runs into troubled waters where you have borrowed money, incurred huge debts and are now unable to repay these obligations, the instant solution that comes to mind is that of filing for Business Bankruptcy. The lure of starting afresh, after seeking solace in Chapter 11 is always more appealing than trying to find means to clear the debt trap that you have fallen into.

However, no matter how grave the consequences, it is often better to say no to Business bankruptcy. Bankruptcy should be considered only as a last resort and out-of-court restructuring alternatives should be given a thought.

The primary reason, people avoid filing for bankruptcy is that it will lead to them losing direct control over their business. Once you start functioning under the umbrella of Chapter 11, there will inevitably be other creditors and new masters ready to take on your share of control as well as decision making powers. The company will be put under tremendous constraints which many third parties like vendors, landlords, service providers etc who have a vested interest may start acting on, as well. Moreover, the debtor will have to start explaining how and why so many things are being done while at the same time have to seek the court’s approval to succeed.

Another important feature of filing for business bankruptcy and the reason one must try to avoid it is the expenditure it incurs. Not only does it take too long to get all the procedural matters sorted out, but it turns out to be a costly affair. A bankrupt company will need to find expert legal counsel, the rates of which may truly be unaffordable. Additionally there will be business advisors, filing fees, administrative expenses, all of which can run up a huge tab.

The resolving of bankruptcies can take far too long which tends to be another reason to avoid them. Moreover the process is slow, tedious and cumbersome. The management will be obligated to spend a significant amount of time planning for and attending court hearings to get the approval of actions that they want to take — and therefore ending up spending little time actually running the business. This may lead to lost opportunities in business, another chink in the armor of bankruptcy.

The long drawn out process of bankruptcy laws combined with the uncertainty it accords, also leads to employee dissatisfaction and low employee morale. This may lead to high attrition rates, which in turn lead to high attendant costs. Hiring and training new employees increases the burden of costs and reduces motivation levels considerably.

Given all the above factors, bankruptcy is a risky decision. Obviously, the reorganization of a company under Chapter 11 is designed to create a fresh start and preserve or enhance business opportunities, but often the process can be quite damaging, perhaps as much as the initial problem and reason of bankruptcy.

Certain industries and businesses are totally averse to filing for bankruptcy. Companies, typically, in the large-scale, long-term construction industry are not good candidates for Chapter 11. One reason for this is the risk of continued payment or progress billing for the work being done. Another reason is that subcontractors may have the right to lien property if they are not fully compensated. Thus, the potential benefits that may accrue as a result of the debtor company being able to avoid immediate payment for certain pre-petition obligations are greatly limited. Lastly, it is difficult for a debtor in the large-scale company contracting business to bid for and win new businesses when under the Chapter 11 clause. Most potential bidders are likely to turn their backs on such cases.

An out-of-court restructuring alternative should be considered as opposed to business bankruptcy as it is not only attainable, but because it can be done relatively faster, with less extraneous activity as well as less expense. Also, because a company is dealing directly with its most important creditors it tends to be a better option. While the pool of interested parties becomes smaller, it also means that the financial losses are not shared as equally as it usually is in a Chapter 11. In these situations, solid planning and communication with the major stakeholders is critical. All in all, business bankruptcy may not be the best solution to a company under-performing. It should be taken only as a last resort solution only when all other options are exhausted.

William Brister - An Answer to All Your Legal Needs.
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