Corporate Finance & Governance | Financial Planning | Leadership / Management

Going bankrupt could save your company

Bankrupt Bankruptcy is a bad thing, right?

Well, it's certainly not good. The news has been saturated with stories of companies filing for bankruptcy protection. Circuit City did it. So did Linens 'N Things and KB Toys. Now everyone is wondering whether General Motors will be next.

And they're not alone. According to The Wall Street Journal, 7,843 companies filed for bankruptcy protection in March, a 23 percent increase over February and the highest monthly total in nearly three years. "In the first quarter of this year, 20,251 businesses sought either Chapter 7 or Chapter 11 protection -- a 52 percent increase over the 13,291 business bankruptcy filings during the same period last year," writes the Journal's Jacqueline Palank.

There's a stigma attached to bankruptcy, of course. It's corporate America's scarlet letter, a sign that reads, "BAD COMPANY."

Under the right circumstances, though, it can be a life preserver that keeps a struggling company afloat -- and even helps it regain its financial footing.

"A bankruptcy filing," writes Glenn Solomon in this Statement article, "provides time for a company to reorganize and repay its debts that existed at the time of the filing."

In fact, Solomon, who is chairman of the Insolvency and Creditor’s Rights Department of Offit Kurman, P.A., says there are plenty of benefits to filing for Chapter 11 protection.

  • It gives the company time to reorganize or liquidate.
  • It gives debtors the right to terminate leases and contracts that it believes are burdomsome.
  • It might help a company reduce its overall liabilities.

There are drawbacks, of course, including bad publicity, additional reporting requirements, increased oversight and a potential loss of ownership. Plus, Solomon says there are additional rules regarding the use of lenders' cash and payments to creditors that must be met.

But before any of that takes place, a company has to determine, honestly, whether it is able to pay ongoing operating expenses during the bankruptcy case. And that's where CPAs come in. Struggling companies need competent advisors to help them cut expenses, draft a new budget and lead them through the many Chapter 11 minefields. CPAs are better equipped than anyone to do that.

"If your client has the wherewithal to pay ongoing operating expenses and the long-term ability to generate a profit to fund a plan of reorganization," writes Solomon, "then Chapter 11 may be a viable option and, indeed, the only option, for your client to survive."

Read Solomon's article in its entirety, then tell us: What's your best advice for leading a client through Chapter 11?


Bill Sheridan