What You Don't Know About Bankruptcy

It has been said that "prior planning prevents poor performance." These five p's are certainly valid today, when economic changes are causing businesses to feel pressure in regard to cash flow. A good business manager looks at potential opportunities and threats that may be ahead. For many in real

Some companies fail because they leverage too much, grow too quickly and get caught up in easy credit when times are good. When things slow down, banks pull credit and are more cautious of all their customer credit. They need to limit their risk, too.

So what happens if your business faces real trouble - even bankruptcy?

The right to bankruptcy is a constitutional right. It is found in article I, section 8, clause 4 of the U.S. Constitution.

For businesses, bankruptcy is filed either under Chapter 7 or Chapter 11. Chapter 7 is a liquidation proceeding available to individuals and businesses. Chapter 11 is a reorganization proceeding in which the debtor may continue in business or in possession of its property as a fiduciary. A confirmed Chapter 11 plan provides for the manner in which claims will be paid partially or totally by the debtor.

Fortunately, not all financial difficulties lead to bankruptcy, but even a terrific business can suffer serious woes. People can avoid a lot of grief by familiarizing themselves with some basic facts about the alternatives to bankruptcy - both personally and in business.Personal liability

John Bonner was an accountant for a North Carolina furniture manufacturing company. The company went bankrupt and John found out that he had personal liability because he had check writing power even though he didn't own a share of company stock.

Can you insulate yourself from personal liability? What asset protection strategies are advised? Here's a suggestion:

Review all insurance policies for protection and liability limits. Your general lines insurance agent will explain coverage and limits as well as existing and potential riders. Uninsured or underinsured risks such as employee theft are costly. If you're preoccupied by stress, employees can take advantage of your vulnerability.Alternatives to bankruptcy

If your business is in trouble, should you reorganize or liquidate?

First, define the problem and causes. Review financial records or bring them up to date. Realistic and accurate accounting is critical.

If debt service payments can no longer be paid, make an informal arrangement with the creditor that can be settled out of court. Creditors may be willing to defer payments or refinance debt to reduce the size of monthly payments. If informal arrangements fail to resolve the overextended debt problem, it may be possible to find a lending agency that could arrange for lower monthly payments over a longer period of time.

Make the most important payments first. Unsecured debt is less of a priority than the mortgage on your business facility. You should quickly limit exposure of management or investors by addressing debts guaranteed by insiders first, such as subletting space or returning leased equipment.

Companies can go out of business without filing bankruptcy. It may be better to sell assets yourself without a formal proceeding or a trustee doing the job for you. Management can usually get better prices for assets because they know the market.Think outside the envelope

Tough times don't last, but tough people do. Before your business caves in, consider these ideas:

* Join forces with another business. Merging may provide both parties a much better chance of success.

* Cut back to a manageable operation. Consider going solo.

* Outsource anything that you can for maximum efficiency and productivity.

* Super specialize. Stick to what's profitable and what you do best.

* Form collaborations to increase visibility, positing and synergies.

Judith McGee is a co-branch manager of Raymond James Financial Services in Portland. Contact her at judith.mcgee@raymondjames.com.

Credit: Judith A. McGee