Not All Roads Lead to Bankruptcy Court: Creative Alternatives for Struggling Small Business Owners
For small business owners, there are few sights scarier than the writing on the wall. When cash flow has slowed to a trickle, accounts payable have become accounts delinquent, and lenders and other creditors start circling like sharks, an owner may reluctantly conclude that their business has reached the end of the road. For many businesses, the end of that road may lead to bankruptcy court. Indeed, filing for bankruptcy protection is sometimes the most prudent course of action under the circumstances. But small business owners in dire financial straits may not realize bankruptcy isn’t the only way out of their current predicament. There are several alternatives to bankruptcy that may offer a better path forward.
Defaulting on a loan is an unappealing proposition for borrowers and lenders alike. For the lender, a default means expending resources on collection efforts that may result in the recovery of only a tiny fraction of what they’re owed, an outcome that also may follow a debtor’s bankruptcy. As such, most lenders are open to renegotiating the terms of a small business loan to reopen the spigot of payments while the business has a chance to get back on solid financial footing. A loan workout may involve agreeing to a longer repayment period, a lower interest rate, or writing off a part of the outstanding loan balance.
Assignment for the Benefit of Creditors
If liquidating and winding down your business is the preferred or only option, an assignment for the benefit of creditors (ABC) offers an alternative to doing so through a bankruptcy court. In an ABC, the business transfers all rights, title, and interest in its assets to an independent fiduciary (the assignee), who then liquidates the assets and distributes the net proceeds to the business’s creditors. ABCs are governed by state law rather than federal law. In Michigan, MCL § 600.5201 sets forth the procedural requirements for the process.
While an ABC sounds like and is indeed similar to what happens in a bankruptcy liquidation, it offers some advantages. ABCs typically cost less than a Chapter 7 liquidation or Chapter 11 reorganization as there are fewer administrative obligations and minimal court oversight. Liquidation through an ABC also typically proceeds faster than it would in a bankruptcy proceeding.
As with loan workouts, a receivership offers upsides to both the troubled small business and concerned creditor(s). It provides a way to “right the ship” and preserve assets for creditors. A receiver is a court-appointed third party, usually at the request of a secured creditor or group of creditors, who works to find a path forward that benefits all interested parties, ideally one that results in the repayment of debts while putting the business back on a sound financial footing. A receiver is typically granted broad management authority over the business, including taking possession of and selling property or other assets, maintaining a bank account, entering into contracts, and engaging in any other business activity deemed necessary and reasonable during the court process. A receivership can also be used as a method for liquidation of the assets in a court-supervised process.
It isn’t the same as pawning a cherished family heirloom for desperately needed cash, but selling or liquidating some of a company’s assets can provide it with the funds it needs to keep loan payments flowing, meet payroll, and keep the business afloat. For a company with multiple lines of business and revenue streams, selling off assets related to less profitable aspects of the business may not only keep creditors at bay but put the company on a course for a more profitable future.
Of course, there is no one-size-fits-all solution for distressed small businesses. As with anything in business and life, every potential choice has pros and cons. And despite the attractive aspects of non-bankruptcy alternatives, bankruptcy may be the best of a bunch of less-than-ideal choices. The wisest way to determine what is best for your small business and you is to consult with an experienced bankruptcy, restructuring, and debtor-creditor rights attorney who can evaluate your situation and goals and help you find the best way forward.