The case for renewal through bankruptcy: some straight talk on reorganizing through Chapter 11--it can be rough, nasty, and emotional, but it gets you back on track to rebuilding your company and its prospects.

• Author: Cloutier, George
• Position: CORPORATE REORGANIZATION

CHAPTER 11 REORGANIZATION, commonly known as bankruptcy, erases 80-90% of your debt, prevents your bank from foreclosing your loans, allows you to eliminate leases and contracts that you don't like, and rebuilds your equity, cash flow, and profits. All litigation against your company stops, and no one is allowed to ask for past due money without court approval.

Be warned. This remedy takes a strong stomach. You'll need the ability to withstand massive pressure from lifelong friends, your community, family members, and employees, and maintain an unwavering commitment to your self-preservation and profits.

It's a devastating choice to have to make, and the social stigma of filing for Chapter 11 often prevents business owners from taking this important and necessary step. They are waiting for their next big contract, expansion of their line of credit, or a private investor. They mistakenly believe the bank won't foreclose on them, the IRS won't seize their assets, and their creditors will stop suing or hounding them for payments. The next thing that happens is usually all of the above. The business fails, and you are looking at starting the rest of your life with nothing.

But if you file for Chapter 11 reorganization early enough, before your assets and cash flow run out and it becomes an act of sheer desperation, you will have a much better chance of achieving a successful bankruptcy and staying in business for many months and years as you rebuild profits.

When to file?

You are eligible to file if your company's assets (at market value) are worth less than your liabilities, or you are unable to pay your bills when they come due. That's when you are able to seek bankruptcy protection from the court.

A classic example of a well-timed bankruptcy is Dow Corning. The company filed a Chapter 11 while it was making millions of dollars, but had built up huge potential liabilities over its manufacturing of defective breast implants. Dow Corning could not have paid all those potential lawsuits had they come due. The company averted failure by filing a Chapter 11, making a settlement on the lawsuits, and emerging as a big ongoing corporate enterprise.

Success stories notwithstanding, most business owners overlook the intent of the law, which is to allow a failing company, whatever the reasons for its demise, to rebuild and reorganize while freezing all financial pressure in place. If you owe the IRS a small or large amount of money, the law also provides shelter, time, and compromise on your debt. All leases and contracts can be broken with the court's approval, even current leases for real...