Filing Bankruptcy is a Painful End to Your Startup



If you are just plain tired of working so hard, or your startup is not getting the traction you expected, should you shut down cleanly, or just file for bankruptcy and walk away? For those who think that bankruptcy is the easy way out, think again. Bankruptcy should always be the absolutely last resort.

The “advantage” of filing for bankruptcy, of course, is that it gets creditors permanently off your back, with no continuing lawsuits, based on funds derived from selling all assets. You can hand the stressful job of liquidating assets and negotiating with creditors over to the court.

The disadvantages are many and long lasting. Your credit rating will be lost for six to ten years, and your business image will likely be permanently damaged. Once declared bankrupt, you as the business owner will likely always face problems opening new business accounts.

To add insult to injury, for a Chapter 7 filing, most courts charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge, payable in advance (does anyone see the irony in charging for bankruptcy?).

There are many other negative implications to bankruptcy. These include the fact that some loans may not be forgiven, your bankruptcy records are open to public review, and any irregularities spotted later can lead to criminal charges.

The best alternative is always to get the business back on track, and sell it at a reasonable value, or do a normal closedown with full payout to vendors and investors. The next best alternative to avoid the stigma of bankruptcy (and the cost) is to privately negotiate partial business settlements with your creditors.

Making the business healthy may be easier than you think. Usually the top problem is pressing debt or cash flow, so here are some approaches to these problems you should try before giving up on the business and damaging your ability to start future ventures:

  • Get a short-term loan. Visit some banks for the best rate and repayment plan that will help your business weather the financial storm. Do not rush out and sign for the first loan that is offered to you, or give up after the first bank declines.
  • Sell assets to raise cash. Now is the time for a thorough inventory of all assets in your business. Chances are that you will find some items you can sell, or property to mortgage, to help alleviate your short-term cash flow problems.
  • Trim expenses down to the minimum. If you have employees on your payroll, enlist their help. Be honest with them — let them know you might be able to save their jobs, at a reduced salary, if they can help you trim expenses down to the bare minimum.
  • Find a friend or family-member investor. If they believe in you, there is always someone who will invest additional cash into your business to help you get back on your feet. You just have to find the right one. At this stage, honesty is the best policy.

As a rule of thumb, only after you have exhausted all these options, and you still calculate that it will take more than seven years to repay your debt, then you should consider bankruptcy. The question is which of the many U.S. bankruptcy filing types you should choose.

For business bankruptcy, there is really only one choice – Chapter 7 liquidation, with partial payments to creditors. Chapter 11 is for large businesses seeking to restructure their debt and continue operation, and Chapter 13 bankruptcy is only for individuals.

But the worst thing about bankruptcy is the emotional impact. It will hit you over the head like a death in the family, a major illness, or a natural disaster. For your own well-being, as well as your business image, I recommend you hand off a running business. It may look like more work, but you will keep your sanity, your integrity, and your will to come back strong.


Reprinted by permission.

Image credit: CC by Abe Bingham


About the author: Martin Zwilling

Martin is the CEO & Founder of Startup Professionals, Inc., a consultancy focused on assisting entrepreneurs with mentoring, business strategy and planning, and networking.

Martin for years has provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers.

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