This past April, Paul Ginsburg was anxious and scared as he negotiated with Sterling National Bank. The 47-year-old president of Manhattan clothier Moe Ginsburg Men's Better Clothing needed to secure financing quickly. The third generation of his family to run a retail clothing operation in New York City, Ginsburg was coming off his worst year ever. His business was declining significantly.

Ginsburg had been hit with a triple whammy. The city's financial community had pared its wardrobe expenses last fall as dotcom shares crashed on Wall Street. To make matters worse, the sudden switch to business-casual dress policies at such stalwart suit-and-tie outfits as Morgan Stanley Dean Witter left him holding too much stock in tailored suits.

Ginsburg himself made the mistake that proved to be the coup de grace. He decided to remodel his store in 2000 and, because he had an aversion to banks, financed the renovation with money that might otherwise have tided him over.

Now banks represented his best chance to get the financing to keep him independent. Without Sterling's guidance and money, Ginsburg didn't stand a chance of filing a successful reorganization plan for his company and its debts under the bankruptcy laws. His creditors might use those same laws to dissolve his business.

The bank agreed to a loan in conjunction with Ginsburg's May 1 filing under the bankruptcy reorganization provision known as Chapter 11. He received so-called debtor-in-possession financing (money granted under special provisions to someone under bankruptcy court protection), won approval of his reorganization plan by his creditors and conducted the first layoffs of his life by reducing his staff from 45 to 25. He was on the road to rebuilding his business.

The American Way of Failure

The bankruptcy laws--of which Chapter 11 is but one portion--help individuals and companies that have suffered a bad turn of events resolve their debt problems.

Although the court shields both businesses and individuals from their creditors, they are treated differently under bankruptcy. Individuals can absolve themselves of their debts completely and get on with their lives--albeit with ruined credit for seven years. Businesses don't get off so easy. They must either repay their debts, whether partially or in full, after winning approval of a plan for doing so (Chapter 11), or dissolve the business by selling its assets for what they can bring immediately and divvying up the proceeds among its creditors (Chapter 7).

Bankruptcy provides business owners an essential refuge to regroup. Creditors, however, can force bankruptcy on recalcitrant entrepreneurs. If the court is persuaded by the argument of creditors, it can force the sale of a company's assets under Chapter 7 or--in rare instances--displace the entrepreneur with new management to run the organization under Chapter 11 protection. That's why it's better to act before being acted upon.

But confronting bankruptcy head-on is no panacea. Ginsburg is one of the lucky ones. According to former U.S. bankruptcy judge Michael McConnell, less than 25 percent of the nearly 10,000 companies that enter into Chapter 11 each year receive approval for their reorganization plans. Those that win approval almost always move steadily through their bankruptcy under the watchful eye of a judge and a board of creditors. They exit the system with a new lease on life--and a bill for lawyers and other professionals that can run more than $100,000.

That means, however, that about 75 percent of firms that enter Chapter 11 quickly move to the dreaded Chapter 7--and destroyed credit. With the odds weighted toward dissolution, is it any wonder that bankruptcy carries such dread? Simon Scott calls the Chapter 7 filing that closed his 8-year-old Los Angeles lighting manufacturer Simon & Co. last year his hardest decision ever: "It's the end of your business and life as you've known it for years." Scott is now running a lighting design subsidiary of Everest Lighting Inc. He hopes to run his own business again in the future, but after the tumult of the past year, it won't be for a long time to come.

More entrepreneurs may be joining him. Although total business bankruptcy filings have fallen by more than half since their 1987 peak, much of the decline happened during the prosperous 1990s. With the economic clouds darkening, many experts expect bankruptcies to skyrocket this year.

Those looking for protection had better hurry to the courthouse. Congress is negotiating the final details of bankruptcy legislation that includes a host of provisions that make it less attractive to file. As of this writing, both the House and Senate versions of the bill delay implementation of the new laws for six months after President Bush signs it, which he has indicated is certain. Entrepreneurs should use those six months to weigh the merits of bankruptcy and other options.

I Have a Problem

Before considering bankruptcy, you first have to face the reality that your business is in trouble. But even when entrepreneurs recognize the symptoms, they tend to focus on the upside opportunities that will alleviate them rather than the downside of bankruptcy.

"They remain convinced that with a little more time, money or patience, it'll be fine," says Melanie Rovner Cohen, chair of the Turnaround Management Association.

Your optimism--essential for starting your venture in the first place--is now working against your best interests. You need to get feedback from outside advisors, says Ed Schiff, the chair of the business services department for Schnader, Harrison, Seagl and Lewis LLP in Washington, DC. Ideally, that's your board of directors or kitchen cabinet. If you don't have a group that regularly advises you, turn to your accountant or attorney. Get their input before you start negotiating with creditors.

Alternatives to Filing

Although bankruptcy is a crucial tool for righting a struggling venture, experts caution against filing if you can avoid it. You should always play other angles first.

"Chapter 11 should be a last option," says Len Shulman, who advises small businesses at the Irvine, California, law firm Marshack, Shulman, Hodges, and Bastian LLP.

Once you recognize something is wrong, you need to look into an out-of-court workout. David Dykhouse, a partner with New York City law firm Patterson Belknap Webb & Tyler LLP, says you have two options: selectively dealing with creditors (say, renegotiating a loan with your bank or your lease with your landlord) or dealing with everybody at once. "The [latter] process can get a little chaotic," he says, "but it is possible to get people to accept less than full payment."

To negotiate, you first have to open communications with your creditors. Tell your vendors why you haven't been able to pay them. Call your banker. "Creditors are very willing to deal with businesses," says Shulman. "They just want to be treated honestly."

If you haven't been truthful or if your creditors perceive that your business is on the brink of breaking up, the shouting can get pretty bad. Those communication breakdowns can be overcome by bringing in a workout expert like Van Conway, president of Conway MacKenzie & Dunleavy PC in Birmingham, Michigan. Workout specialists, who are most easily found on the Internet, identify cost savings in your processes and raise cash by financing assets in ways you might not have considered. When they present their plan to your creditors, they can sound like the voice of reason. "Creditors appreciate the outside voice," says Conway.

There is one other option to consider. Keeping in mind that 75 percent of Chapter 11 filings advance to dissolution under Chapter 7, maybe you should sell your business-or just auction its assets and pay your creditors-and start planning your next one.

"Sometimes a workout is having a graceful exit from a business," says John Ventura, author of The Bankruptcy Kit (Dearborn Financial Trade) and an attorney in Brownsville, Texas. "The fact that you went out of business won't prevent you from getting financing in the future. It's how messy you did it that can get you into a little trouble."

It Goes to 11

Convinced your business can survive Chapter 11? Willing to put in the effort that will be required to save it? Good. You're going to need that determination to make it through alive.

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