Knowhow: Bankruptcy Alternatives | Advice on what to do if a financial crisis arrives
Chapter 11 bankruptcy is a legal proceeding designed to allow businesses to reorganize and restructure their debts.
But is it the best, fastest, or most efficient way to deal with financial uncertainty? Probably not. Before jumping into the deep end of the pool, here are a few steps and alternatives that you may want to consider.
Initiate. Do not react. Even though creditors may be banging on the door, you can and must remain in charge. To accomplish this, keep three things in mind. First, know what your legal rights are. Second, remember that this is your business and you know more about it than anyone else. Since knowledge is power, make sure that you have all the knowledge you can possibly get about your financial condition along with your legal rights. Third, make sure that the professionals that you employ have experience in financial crisis management and that they are willing and able to make you their top priority in your time of financial crisis.
Understand the order of priority. Simply because a creditor demands money does not necessarily mean they are entitled to it at that moment. Make sure that you read and understand the underlying documents that establish your relationship with the creditor. You will be surprised how many creditors, both secured and unsecured, do not document their transactions correctly. Many miss the statute of limitations, violate the law, or simply are poor record keepers. Do not roll over quickly, even if you feel a moral obligation to pay them.
Communicate. All creditors want to know what is going on. Don’t be afraid to tell them that you are having problems and are trying to work things out. This is particularly true with secured lenders or the taxing authorities. Let them know about your situation, particularly in light of the fact that you may need their help. The more they know the greater likelihood they will work with you.
No is an answer. In time of financial crises, cash is king. All available cash has to be used to maintain operations. If you need money for payroll or materials, be up front about your situation. You must know how to prioritize your cash resources and not be afraid to tell people they will have to wait.
Cutting costs is only half the battle. Good companies realize that operational success comes from two primary successes. The first is managing the cash. The second, and sometimes more critical issue, is managing your operations. Do you implement and manage IT correctly? Do you have strong banking relationships? Do all the people you employ know their jobs and who they report to?
Be patient. Remember that it probably took you years to get into financial trouble. Do not, therefore, assume that your issues can go away quickly. Debt relief is often a matter of wills. Believe it or not, given the current economy, you are probably one of many to your creditors. To you, you are one of one. This means that your efforts are concentrated and thus are powerful and sustaining over the long run.
Look to creative strategies. Aside from the management and operational suggestions, there are at least three alternatives to bankruptcy, including an informal creditor composition, an assignment for the benefit of creditors, and a trust mortgage. If your advisors do not know about these alternatives or how they work, you may want to seek out other advisors who do.
There are no shortcuts. Bankruptcy is time consuming and expensive. More often than not, it does not provide the results you expect. You are better served keeping control of your company and the decision-making processes than having others run it for you.
Steven A. Kressler is president of Financial Diagnostics Inc. He can be reached at stevenkressler@yahoo.com.
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