Small business bankruptcy is complicated

Stephen Costello's visitors typically "walk out feeling better" after they've talked with him, which is a little surprising because Costello is a bankruptcy attorney. He's the only attorney, in fact, at Costello & Costello P.C., Carpentersville.

"The business owner knows more (about bankruptcy), and the stress begins to lift," Costello explains. "It's my job to explain what would happen. It's the business owner's decision" as to whether bankruptcy is the right choice.

That's not a choice most entrepreneurs ever expect to make, but the companion facts that small businesses account for "a lot" of the increased activity at Costello's practice and that Chicago bankruptcy attorney Peter Berk, of the Law Office of Peter L. Berk, says business "was up 40 percent last year and is up over that so far this year" indicate that more businesses are at least exploring the bankruptcy option.

Bankruptcy can be complicated. To help, but with the caveat that every situation really is different, here is some basic small business bankruptcy information based on conversations with Berk and Costello:

• Business owners looking at bankruptcy generally have two options: Chapter 7, which refers to the chapter of the bankruptcy law that provides for liquidation of a business, or Chapter 11, which allows a business to keep operating while it reorganizes.

• Viability can be an issue. "You've got to be big enough to do a Chapter 11, and the business has to be viable," Berk says. "There has to be enough revenue coming in to satisfy creditors" in a reorganization.

Costello adds that Chapter 11 often is "too expensive for very small businesses." Figure a "$15,000-$20,000 retainer to get the case filed," he says. A Chapter 7 filing is likely to cost about $5,000.

• One problem is that "Businesses tend to wait until things get pretty dire" before seeking help, says Berk. "It's often an emergency situation where a creditor has gotten a judgment or the owner sees that the business will default."

In that context, a dose of realism can help. "Everyone is optimistic that things will turn around," Costello says. "They usually don't."

• The corporate veil that is one reason many entrepreneurs incorporate their businesses may offer some protection in a bankruptcy. "If there are no personal guarantees, then corporate officers generally are not liable" for a business' debts, Berk says.

• It is possible to essentially liquidate your business today and start a new one tomorrow - although, Costello warns, there "always is a suspicion among creditors that you've squirreled enough assets away" to fund the new business.

"The legality matters," Costello says. "Stealing assets (from the bankrupt business) and bringing them into a new one is something I won't tolerate. Neither will the courts."

Questions, comments to Jim Kendall, JKendall@ 121MarketingResources.com.

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