Is There a Way to Avoid Bankruptcy?

In the wake of the current bankruptcy debacle with some big Wall Street financial firms, you may wonder if they could have avoided bankruptcy. Sometimes it is possible for a business to avoid Chapter 11 (reorganization) or Chapter 7 (liquidation). Here are some alternatives:

• Work out a deal with creditors In other words, set up a plan much as a bankruptcy trustee would do, and see if you can get creditors to accept it. No one wants to go to court necessarily, and creditors know that it will cost them if the debtor declares bankruptcy, so sometimes they are willing to settle for a "reasonable" percentage of what is owed to them. Of course, all it takes is one stubborn creditor to put the whole deal off, and the process is informal, and thus not binding on creditors.
  
  
• Find New Sources of Cash
  This sounds easier than it is. When a business is financially strapped, it is because there is little or no cash available, and it usually means that the company has borrowed up to its limit. But sometimes, you may be able to find additional cash by (a) selling unused assets, (b) cut-backs and layoffs, or (c) new sources, such as private lenders or higher-cost lending alternatives. Buying time with additional cash can hold off bankruptcy, at least temporarily.
  
  
• Consider State Bankruptcy Processes
  You may be able to use state law for a process called "assignment for the benefit of creditors" (or an "ABC"). This process is used for liquidation, and an "assignee" (similar to a trustee) is appointed to oversee the process. For private companies, an ABC might be a possibility.

It is always best to consult an attorney if you are considering the necessity of bankruptcy.