Home -> Law Blog Directory -> Bankruptcy Blogs -> Arizona Bankruptcy Attorney Blog

Bankruptcy

: Arizona Bankruptcy Attorney Blog

Small Business Bankruptcy Alternatives: the Seven Faces of Dr. Bankruptcy

By Joseph McDaniel, Esq.

Has anybody seen an old movies called "The 7 Faces of Dr. Lao"?

Well, don't bother.  It's awful.

But seeing that name reminded me that there are about seven different alternatives associated with the Bankruptcy Court for a small business that has insolvency issues.

Mind you, most small businesses today, during this depression, have some sort of solvency issue floating around.

That's because a small businessman always has to make decisions based on inadequate information, and that's just the ordinary course of business for a small business.

And a small businessman usually doesn't expect his volume of business to drop in half, overnight!

But when this depression hit, that's what happened to many small businesses in Arizona, including businesses as diverse as hair salons, restaurants, body shops, and chiropractors.  

There is an infinite amount of diversity among businesses, because each small business is literally unique. Note: the word unique has a unique meaning. We'll talk about that.

So what are the alternatives if a small business loses half the business it was doing, and loses it overnight?

Well, Option Number One is simple.

The small business does nothing different at all.

Is that a good option?

You'll love this answer: it depends.

Pretend that the business sells electronic art on the Internet. The business lives on a free website, and there is no cost of goods sold because the art is electronic, and the art costs nothing because it's generated by the artist who owns the website.

In that case, a drop in half the income of the business just means that the artist can buy less absinthe. Probably good for his health and longevity, after all.

How about a business that has a high fixed overhead, like a hair salon with twenty chairs, that has heavy yellow pages advertising, many employees, big salary payments,  and a big lease payment every month?

Well, if that business, which had a decent profit margin when it had a ton of volume, loses half that volume, it's probably going to be a bad day for the business.

That still begs the question, what are the options for a small business when the volume of business drops in half?

One of those options is to borrow money until the volume comes back.

Sure, that could happen during a depression!

Sadly, many small business owners try to borrow from friends, relatives, and their retirement vehicles when business slows down; and that's because in the past, the volume always picked up again fairly quickly. Then the business can't pay back the former friends, former relatives, and former retirement vehicles.

Borrowing is not a very good option these days.

There is little money available for a small business that needs it; and many small businesses with liquidity problems already have liens, mortgages and security interests in favor of a lender loading up both their personal residences and all of the assets of the business, from the accounts receivable to the barber's shears.

So Option One, which is doing nothing, will probably not provide a good result in most cases; in most cases, there will be lawsuits filed presently, maybe asking for the appointment of a receiver, and that will often end the life a small business.

And Option Two, borrowing money to keep the business afloat, is a great alternative if you can find the money at a reasonable rate of interest, and if the business volume is going to come back in a reasonable period of time.  But that will often not be the case, especially because there's little to nothing left to lien in many small business cases.

What's Option Three? Well, that's for tomorrow, I think. But we'll talk for a little while tomorrow about negotiating with creditors, secured and unsecured and priority.

But ultimately, like the 7 Faces of Dr. Lao, I expect we'll see about seven distinct alternatives for a small business that can't pay its bills, when the owner doesn't want the business to die (because it's the owners Rice Bowl)!

Now, you might think that because I'm an Arizona Bankruptcy Attorney, I'd have a bias in favor of bankruptcy as a repair job. But that's only sometimes true!

I like the idea of a bankruptcy when there's a reasonable chance that it will make things better than they were before.

And sometimes I'll file a bankruptcy for a client, not because it's the best option, but because it's the only option available in the toolbox.

Full post as published by Arizona Bankruptcy Attorney Blog on December 05, 2010 (boomark / email).