Bankruptcy now or more debt?

[garret018]

What is the name of your state? Minnesota

I am an S-Corp, retail business, and I've only been open for 8 months, but business has been much, much slower than anticipated, and several semi-nearby competitors have already closed. I plan to stick around at least through Christmas, when sales will be at their peak, and hopefully business will pick up with fewer competitors, but as of right now, monthly sales are averaging about $2,000 versus $5,000 in overhead, with a 60% margin.

I currently have approximately $10,000 in the bank, with $15,000 in credit card debt, as well as two SBA loans, one with roughly $30,000 in principal left, and another with about $25,000. I also have two untapped LOCs for $17,000 and $15,000, and several other credit cards with $10,000 limits. I'm the personal guarantor on all of these accounts, but I have very little in the way of personal assets; I don't even own a house.

I have a bizarre living situation: technically I don't own this house - I'm not on the mortgage or the title, but I live there with several friends, and we've all been paying equally with a gentlemens' agreement (in writing, with meticulous notes kept for payment, etc) that in 2010, we will sell the house, and each of the 4 of us will receive our fair share from the sale of the house.

When I applied for my first loan, I explained this situation to the lender, and told him that I absolutely couldn't allow the house to be used as collateral, and that I technically didn't own it anyway. And at the time, I wasn't too concerned when he listed the house as an asset but not as a liability on my loan application, but now I'm concerned that this discrepancy might be construed as some sort of fraud, although my lender fully understood the situation and is the one who listed my assets.

My question is, I have substiantial doubts about the viability of this business, but I have access to funding, so I could potentially extend this venture out for another year. I honestly don't expect it to succeed in that time frame, either, but it gives me a chance. Is it better to surrender now, with less debt, or gamble on that extra year, which isn't likely to succeed and will probably add another $45,000 or so to my debt (even if it does make it, that's a significant amount of debt to overcome: about $115,000 in total)

 

[cheapo]

Do you lease space for this retail business? What personal guarantees have you signed for this business?
I am not a lawyer, but my feeling is to get out if you can. Personally, I hate to build huge debt.

 

[garret018]

I lease space for this business, so I'm in a five-year agreement regarding this space. It's my understanding that, unless the property management company decides to release me from that agreement, the only way that I'll get out of it is bankruptcy.

Also, my personal guarantee is on everything. It's fine for people to say that you should never provide a personal guarantee for your business, but before you've established a business, and even then, most places want an actual human being they can hold responsible. That means that I'm on the hook for credit cards, the lease, and both SBA loans.

Everything I've read about this has basically used karma as the single biggest factor for accumulating more debt. My situation is that I have guaranteed bankruptcy now, or likely bankruptcy later. If I gamble further, I accumulate more debt. I'm not trying to defraud anyone; I'm simply trying to keep a positive cash balance until business picks up.

My primary concern is regarding the accumulation of more debt when bankruptcy seems likely. I've already been granted these lines of credit, and I would be using the money in the best interests of the business, but unless things change significantly (which is literally what I'm banking on) bankruptcy seems to be in my future.

Are there any sort of legal or bankruptcy issues I should be aware of in this situation? I know that in Minnesota, debts newer than 71 days won't be dismissed, but I'm confident that this business can outlast that by several months before I'm forced to give up the ghost.

 

[cheapo]

The business does not sound like it will be a winner for you. Competitors closing down is not a good sign for a business trend, unless you are the one closing them out of the market and that does not look like the case. You are in debt $115,000 and you are selling $2000.00 a month? at 60% margin meaning you are clearing only $1,200 a month pretax with a overhead of $5000 a month?!?!? There is nothing here that says that this business is going to work.
In the future, in regards to personal guarantees you can try to opt for a differnt kind of personal guarantee such as a limited one. Sometimes you can get a creditor to go for a time limit on a personal guarantee, such as 5 or 10 years. Or sometimes you can go for a max limit on a peronal guarantee, such as 50K or 100k. As a Sub-S, of course, you probably tried to go for a corp guarantee, which would have been the best one to try and get.
Try and find a Bankrurtcy lawyer to talk to. Try and find one that won't charge you a large fee upfront to talk to them. BK is not cheap. BKs should be planned for long in advance and make sure you have the money for a BK. Some small bussiness spend 11k to 25k on the low end for legal fees for a BK.

 

[garret018]

Thanks - that's the kind of advice I'm looking for; consideration of existing factors versus potential benefits and changes. Like I said, I'm planning on keeping everything going through Christmas, and then making my final decision at that time.

I think, but I'm not sure, that Minnesota requires you to undergo some sort of bankruptcy counselling before filing the petition for bankruptcy. As far as I know, the purpose is to steer as many people as possible towards some sort of repayment plan, rather than attempting to have their debts dismissed.

In my case, I don't think restructuring would work, given the fact that the business doesn't have the means to continue making payments, and without the business, I have no income - and even with the business, I don't have an income. I sunk the better part of my own cash into the business as the initial capital injection, and kept enough so that I could pay the bills for the following year, as well as a very modest amount to cover necessities like clothing, food, and the occasional evening out to keep my sanity. Since I have limited assets and I don't have any other income (I'm not married, and I've been running this business full-time) there's no way I could personally handle the debt, either, so if bankruptcy really is in my future, Ch. 7 seems to be the only real option for me. If that's the case, can I just close the store and handle whatever debt falls to me on a personal level?

As an S-Corp, I was under the impression that there's no such thing as corporate bankruptcy, meaning I make phone calls, explain the situation to everyone that I have an outstanding debt with, and wherever there's a personal guarantee, they simply go after me for monies owed. There are a few things, like my yellow pages ad, where there's no personal guarantee, which I take to mean that if I were to close the shop, nobody would be around to pay the bills, so they just give up (or possibly try to go after me)

Also, I have a few personal credit cards and a line of credit, all with zero balances. Since I don't owe anything on these, it's my understanding that I won't have to list them as creditors if I do end up filing for bankruptcy. What will become of those - will they close them once they notice my ruined credit, or am I allowed to keep them, seeing as I have a perfect payment history with them?

Clearly, if I'm examining bankruptcy as a likely scenario, I don't have much available cash, which means that I need get as much information as possible on the cheap. Is there any advice anyone has regarding time frame, getting the process started, and what information I'll need? I'd like to get all my ducks in a row before I go any further with anything.