Is There Life After Bankruptcy?

I recently worked with a client as their part time CFO that filed Chapter 11 bankruptcy and successfully emerged out of bankruptcy approximately 16 months later.  It was a difficult and costly proposition but in the long run saved the company and the jobs of 60+ employees.   As the article below points out, they were given this “fresh start” but life after bankruptcy has many challenges.  Fortunately, the company had a great relationship with its bank that stayed with them through the entire process.  The issues that plague the business  today is that credit is difficult to get and as their equipment continues to get older and the costs mount to keep them in working condition.  Obtaining new financing to replace this equipment is still difficult to find.  Sure, there is life after bankruptcy, but no one said it was going to be easy.

I wanted to share an article by Brian Headd titled Banking on a Second Chance:

Can a business rise from the ashes, like a phoenix and fly upward?  Or does this concept have more in common with that other mythical beast, the unicorn?  U.S. business bankruptcy laws are designed with business survival or a “fresh start” as a goal and Aparna Mathur put the results to the test in an Office of Advocacy funded report, Beyond Bankruptcy: Does the Bankruptcy Code Provide a Fresh Start to Entrepreneurs?

The study uses data from the Federal Reserve Board’s non-defunct Survey of Small Business Finances.  At some point in the previous seven years, owners of 2.6 percent of firms filed for bankruptcy.  With about 1 percent of businesses filing for business bankruptcy every year and scores more filing personal bankruptcy, it is difficult to calculate how many firms entered bankruptcy but ended up surviving.

Surprisingly, previously bankrupt firms perform similarly to non-bankrupt firms.  They are just as burdened as other small firms by problems such as poor cash flow, high health insurance costs, or excessive taxes, and they attain similar employment firm sizes.  While the system helps certain small businesses maintain operations, access to credit remains a problem.  These issues increase the probability that firms will not even seek credit after a bankruptcy.

The report also finds some worrisome differences in credit access across minority-owned businesses.  Black and Hispanic owned businesses are charged higher interest rates and are more likely to be denied loans, while Asian-owned businesses essentially mirror U.S. averages.

Mathur concludes, “While the bankruptcy code does help certain businesses get back on their feet, the persistence of credit assess issues after bankruptcy suggests that the promise of the “fresh start” has not been fully realized.”

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