Bankruptcy

When Your Business Is In Trouble, Don?t Fudge The Facts

By Wendell Sherk, Missouri Attorney

Owning your own business is part economics and part love affair.  Doing what you love for money is nearly every American’s dream.  But when love affairs go bad, we react emotionally.  That can be bad for business, particularly if you are on the verge of bankruptcy.

In a recent example, we learn that it’s dangerous to tell your supplier or banker things you can’t or won’t really be able to do.   If it doesn’t play out well, you might lose your fresh start options.

In this case, the business was heavily in debt to its main supplier of concrete.  And the supplier decided to cut off further supplies and require cash at time of sale instead of waiting for payment, after the business was paid for services to the ultimate customer.  This is often a death sentence for retail and contracting businesses since they often do not have the capital base to pay COD for everything.

Unfortunately, when negotiating with the supplier the business owner was desperate not to lose his business.  So he agreed to a payment plan and also promised he could make the payments because he would take nothing out of the business himself before paying off the business debts.  And the supplier began deliveries again.

As with many failed love stories, things did not go as planned and the business could not keep making payments and eventually the owner filed for bankruptcy.   But worse, the Court of Appeals held that the owner could not get out of the obligations owed to the supplier.  In part the court concluded that promising the near-impossible — to pay the business debts before taking out anything for himself — while somewhat unlikely in the circumstances, was not completely unbelievable.  So the supplier justifiably relied upon that (and other) representations in extending more credit.

There are a lot more lessons to be learned from this case — don’t co-mingle business and personal finances, don’t take the assets of one business to start another, and so on — but at the heart of it is a simple idea:  When you’re in trouble, it’s better to say nothing than too much.

If you can’t — or probably won’t — do what you are about to promise, don’t promise it.  Businesses fail.  That’s why bankruptcy was first turned into a remedy to help debtors rather than just creditors.  You can start over.  Don’t let your pride — and your love for your business — get in the way of your second chance.

Full post as published by Bankruptcy Law Network on May 17, 2010 (boomark / email).