When to consider bankruptcy and how to survive it

When to consider bankruptcy and how to survive it

On average, 129 American businesses file for bankruptcy every day. In addition, personal bankruptcies, some of which are tied to business failures, are clocking along at more than a million a year. Experts say that the high numbers are attributable to the easy availability of credit during an economic boom, but that’s no comfort if you face becoming one of the statistics. Take Gene Maddalena. When he placed that first call to a bankruptcy attorney, Maddalena experienced a fear deeper than any other he’d known. “Our lives were falling apart,” he recalls. “I wondered how things had ever gotten this far.” When Gene and his wife, Janet, started their wholesale cheesecake business in 1982, they were like many entrepreneurs, filled with youthful optimism and enthusiasm. The business took off, and soon they were selling cheesecake across the country and in Canada and Mexico. The Maddalenas bought a large piece of property in New Jersey to serve as home, professional kitchen, and business headquarters. But Maddalena sadly lacked in business acumen. “I was naïve,” he admits. He also had classic cash-flow problems. Clients were slow to pay. Large customers squeezed him for discounts. So, Maddalena took on a partner, personally guaranteeing his partner’s investment in the business. “I put up my property as collateral,” Maddelena says. “I never thought it would be a problem.” It turned out to be a problem indeed. After Maddalena and his partner disagreed on key issues, the partner called in the loans. “You’re on your own,” he said, leaving Maddalena on the hook for more than $1 million, all of it personally guaranteed. That’s when Maddalena turned to a bankruptcy attorney. On the attorney’s advice, he filed for personal bankruptcy in 1995 under Chapter 7 of the U.S. Bankruptcy Code. Chapter 7, which stipulates asset liquidation, is a bankruptcy proceeding where the debtor’s belongings – financial and physical – are sold to pay off creditors. Soon afterward, cash-hungry creditors forced Maddalena’s Cheesecake Co. into Chapter 7 as well. Thousands of business owners each year undergo a similar experience. A total of 47,125 businesses filed for bankruptcy in the 12 months before September 30, 1998, according to the American Bankruptcy Institute, an industry research group. But humiliating and devastating as it may be, bankruptcy does not have to be the cause of entrepreneurial death. THE RIGHT TIME When should you, as an entrepreneur, consider bankruptcy? Kenneth Lefoldt, CPA, CIRA, and vice president of the Association of Insolvency Accountants, says that one of the critical factors is cash: “Cash is like blood for a business. If you have no blood flow, you’re not going to survive.” (For a list of Lefoldt’s warning signs, see “When to Consider Bankruptcy,” opposite.) It is important to keep in mind that bankruptcy is not for everyone and is not always the right option. “A professional insolvency lawyer may help you find a way to work out the problem without filing bankruptcy,” says Neil Olack, bankruptcy attorney, member of the board of the Alexandria, Va.-based American Bankruptcy Institute (ABI), and a fellow of the American College of Bankruptcy. “Don’t wait until the situation has reached crisis proportions. Once the lender is about to foreclose, it’s usually too late to work out a deal.”

Posted by on September 1, 1999

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