Bankruptcy Options For Failing Small Business

Small business experiencing financial problems generally speaking fall into two categories: the hopeless or the impaired. The hopeless business is one who has put itself on an errant business track which is leading inextricably to financial disaster. For that business, chapter seven liquidation is often the answer in order to avoid an avalanche of lawsuits from trade creditors and customers. The impaired business is a business in trouble, but one which can turn itself around with a little bit of help and time. The impaired business may be in financial difficulty, but it also usually has valuable assets. For the business with assets and with hope, Chapter 7 is not the answer.

The business in difficult, but with hope, has two options. One option is Chapter 11 which provides time through a reorganization plan. Chapter 11, however, is very expensive for the small business. Another option is avoiding bankruptcy and simply closing operations. The business is not dissolve; it just stops taking customers and collects old receivables. The owners then try to reconstitute their business in a new business entity. Creditors will attack the new entity as the alter ego of the initial , debtor entity. The owners have to establish sufficient business reasons to start a new entity for their business other than avoiding their prior creditors. One possible business reason is bringing in new owners, possibly, a new owner who invests money to help the business but who refuses to be saddled with debts of the old business. This type of business reorganization should avoid bankruptcy because bankruptcy trustees will be relatively more effective in pursuing claims against the newly formed business under theories of alter ego or fraudulent conveyance.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida