While details of super-sized corporate failures, like GM and Chrysler, are being splashed across front pages of newspapers and websites, grabbing our attention and garnering an inordinate amount of debate, the reality is that the vast majority of commercial bankruptcies are filed by entrepreneurs and small-business owners. The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings. On average, during the first six months of 2009, some 350 commercial enterprises file for bankruptcy daily - an increase of 240% from 2006, the first year after the bankruptcy law was changed.
Today's economic landscape has proven to be especially toxic to small business owners. Factors such as higher gas prices, lower consumer discretionary spending, and the credit squeeze have all put a strain on small businesses. Ironically, the bankruptcies of the very large companies can also contribute to the pain. "When you have the GMs of the world filing for bankruptcy, they are canceling contracts and discharging debts that they owe to their suppliers," says B. William Ginsler, a bankruptcy lawyer in Portland, Ore. "And those are small businesses that are less solvent than larger corporations."
The decline of the transportation industry, which includes the auto and airline businesses, has been the biggest trigger in small-business bankruptcy filings, according to new data from an Equifax bankruptcy study. Downturns in the construction, manufacturing and retail industries are also contributing to the increase in filings.
These days, small businesses are working harder than ever to stay viable. But more and more are finding that the economy is an obstacle too onerous to overcome. Many small businesses owe so much money to creditors that there is no future. Bankruptcy is still the only option for many small-business owners who are hanging by a thread.
Bankruptcy doesn't always necessarily mean that the company must stop operating. In many cases, the business may continue or be sold as a going concern after a Chapter 11 filing. Larger bankrupt companies, such as Six Flags, use Chapter 11 of the Bankruptcy Code to "reorganize" its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court. But bankruptcy reorganization under Chapter 11 requires significant time on the part of the owners and managers, and expert legal counsel.
Other small business owners may choose to file for Chapter 7 bankruptcy and shut their businesses for good. Under Chapter 7, a trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors. Often, a small business owner's personal finances are so intertwined with those of the business that he would be left open to personal liability under Chapter 7. In fact, in most small business cases, the owner has personally guaranteed most of the business debt. In these cases, it makes more sense to shut the business down and file for personal bankruptcy under Chapter 7 or Chapter 13.
If you are concerned about your business in these tough economic times, it's time to speak to a bankruptcy attorney. In North Carolina, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 today.