"My business has been shut down the past couple of months due to the COVID-19 pandemic.
"My state is just beginning to ease things up a bit, and I may be able to open up again in the next couple of weeks.
"But there is no way I can catch up on all my debts. I owe three months' back rent to my landlord, three months' missed payments to my SBA lender, and have run up $25,000 in credit card debt just to stay afloat.
"It's going to take me at least a year just to catch up on these payments. Am I better off trying to negotiate all these debts, or are things so far gone that I'm better off just going out of business?"
I have received 25 emails in the past week just like this one.
No question about it: We will be seeing a tsunami of small-business bankruptcy filings in the coming months, and many more business owners will be asking, "Can this business be saved?"
When you're faced with a mountain of debt, there are two things you need to do right away:
— Perform triage.
— Do a liquidation analysis.
These will give you the information you need to decide whether you should stay or go.
Performing Triage on Your Debts. "Triage" is French for "dividing into three parts." The word originated on the battlefields of World War I. When a battle ended and the wounded were transported by rickety ambulance to the field hospital behind the lines (think "M*A*S*H"), the doctors divided the incoming wounded into three piles. Pile No. 1 included those who could be saved if operated on immediately. Pile No. 2 included those who weren't injured as badly and could wait awhile. And pile No. 3 (sadly) included those who were too far gone and were quietly left to die (perhaps with a shot of morphine to kill the pain).
You will need to divide your bills into three piles as well. Bills for essential goods and services — those without which your business won't be able to survive — go in pile No. 1. Debts you have personally guaranteed as the owner of your business (such as the minimum monthly payments on your credit cards) should be put in this pile as well. Bills you need to pay creditors that are difficult to deal with (they refuse to negotiate; they call you three times a day screaming, cursing and threatening to sue — you know the ones) go in pile No. 2. All your other bills go in pile No. 3.
You should make every effort to pay the bills in pile No. 1 as soon as possible, and treat these creditors like gold. You should try to pay the bills in pile No. 2 over the next six months if possible, especially if the amounts are small. Once these difficult creditors see money coming in every month, they will probably calm down a bit and give you some peace.
The people in pile No. 3 have to wait until you are ready to pay them. Not the greatest outcome, but it's all you can do.
Perform a Liquidation Analysis. This sounds complicated but is actually very easy. Basically, you are taking a snapshot of your business to see how many of your creditors would be paid in full if your business were to shut down permanently today.
First, make a list of all of your creditors and the amounts they are owed (don't worry about future payments). Divide them into three categories: secured (debts that are secured by liens on your business assets), personally guaranteed (bills that you have agreed to pay personally) and everything else. Then, do your best to figure out how much cash you would be able to raise if you were to sell all of your business assets today and how much revenue you can reasonably expect to make in the next six to 12 months.
Once armed with this information, here are some guidelines for deciding if bankruptcy is the only option:
— If all of your pile No. 1 debts can be paid now and you can pay most of the other debts within the next six to 12 months, you are probably better off trying to stay alive and negotiating with your creditors outside of bankruptcy.
— If you only have a few debts owed mostly to institutional and/or sane creditors, you are probably better off trying to stay alive and negotiating with your creditors outside of bankruptcy.
— If you owe lots of debts to lots of people, both sane and crazy, and if you were to liquidate your business today and be able to pay most or all of the debts (or at least the secured and personally guaranteed debts), you should consider reorganizing in bankruptcy (more on that next week).
— If you owe lots of debts to lots of people, there's little revenue on the horizon and liquidating your business wouldn't pay off half of them, then you have no choice but to shut down and liquidate your business in bankruptcy.
More next week ...
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.