Alternatives to Bankruptcy – for Business Owners with Large Debts

1 Minute Summary: For a business with pressing debt loads, there may be alternatives to bankruptcy that will allow either asset liquidation, sale of the business or debt negotiations to settle creditor claims.  There can be advantages to avoiding bankruptcy court in some instances, and depending on the business form used and the goals of the owners, an alternative may be preferable.  Creditors may be more open than one would believe to accepting changes to payment terms, if they have confidence in the arrangement being offered.

Many businesses rely on financing and credit arrangements to maintain their cash flow and meet capital requirements.  This is a normal and customary aspect of commercial transactions, and without credit many business-to-business contracts could never be fulfilled.  Credit is one of the economic engines of the business world and it is not uncommon for a majority of transactions to be done via financing arrangements.  However, suppliers and lenders are increasing scrutiny before extending credit to businesses.


The Downside of the Use of Credit in Business Transactions

However, there are times when a business becomes overextended with too much debt due to low sales, high overhead or poor financial planning.  This happens to the Fortune 500 companies as well as small sole proprietors offering a product or service on a limited scale.  The issue for any sized business is how to manage the debt load in a way that allows operations to continue uninterrupted, and avoid the collections or legal actions by creditors seeking payment.

Some businesses elect to file for bankruptcy, and if they are looking to reorganize the debt under the supervision of a bankruptcy trustee that can be a viable approach.  Chapter 11 repayment plans are used by all types of businesses to manage debt and continue operations unimpeded.  However, bankruptcy can be expensive, and is always a negative mark on the credit report and rating for a business.  For that reason, many business owners look for alternative methods to try first, before committing to the bankruptcy process.

Overview of Alternatives to Bankruptcy

The alternatives available to bankruptcy will depend on the type of business form that you are using.  Corporations and LLCs have different options available than sole proprietors and partnerships.  As always, the business owners’ goals and outcomes will be a determining factor.  It can be advantageous to look into alternatives since it does give you control over the process and outcome, unlike bankruptcy where the trustee will assume control over assets, creditor payments and other reporting requirements.

Options for Sole Proprietors and Partnerships

Sole proprietors and partners of general partnerships will generally have personal liability for debts, which will influence their choices when it comes to handling creditors and potential solutions.  They cannot simply walk away from a failed business and expect that there will not be any consequences.  This requires a proactive and strategic approach to avoid collections, legal action and damage to the personal credit rating.

1.  Selling the Business:  If you have a business that is functioning and has market value, it may be possible to sell it, and then use the proceeds to pay off creditors.  This may bring more money than liquidating the assets separately, and is tremendously simpler.  Some buyers may be willing to assume certain types of debts as part of the sale agreement, and these are points that can be negotiated. One thing to consider with this option, is that if you sell the business, you can always start over again with a new business. You have a chance to get out of your current line of business, or to reopen your business under a new name, in a new location, or with a completely new twist.

2.  Liquidating Assets:  An owner can consider selling part or all business assets as a means to pay creditors and avoid legal actions.  If a business has many assets, then this can be a valid approach, but if an asset sale leaves the business unable to function it may be a precursor to closing down altogether.  One advantage of this over bankruptcy is that you may be able to get a better price for assets than a trustee who is simply looking for a quick liquidation.

3.  Delaying Action or Payment:  As with personal indebtedness, you can simply not make payments and let creditors decide their next move.  If you have few personal or business assets, then there is no reason for a creditor to initiate costly litigation, and they may just charge off the debt.  They can retain the right to litigate at any time, so this option carries risk if your financial situation changes.

4.  Debt Negotiation:  One method of dealing with creditors is through direct negotiation for a payoff amount.   If a creditor knows that you are in financial trouble they may be willing to accept a payoff of the debt for less than the full amount.  If you have a good relationship with the creditor or are a skilled negotiator, you can do this yourself.

Also, there are firms that specialize in this type of debt negotiation who can perform this service for a fee, often a percentage of the amount that they save you.  In either case, the payoff needs to be clearly documented as payment in full on the debt, and some type of escrow may need to be used where both payment and documentation of the payoff are facilitated by a third party.

Options for Corporations and LLCs

For corporations and LLCs  there are two separate options available that can either allow the business to continue operations and manage debts, or provide a non-bankruptcy means of dissolving the enterprise.  As with owner-operated businesses, selling the business and liquidating assets are always options if the business cannot be sustained any longer.  Corporate shareholders and LLC members are typically insulated from personal liability for company debts when it closes, as long as certain legal and financial requirements have been met.

1.  Out of Court Workouts

As the term implies, a workout is an attempt by the business to arrive at an arrangement with creditors for payment of debts.  This is accomplished out of court and through a process of negotiation with the creditor.  The debts can be paid through either future cash flow, additional equity investment or new financing.  This type of workout requires careful planning by the business to demonstrate to creditors their willingness to repay the debt, and the specific means that will be used.


In some cases, the original lender may be willing to extend the payment period or change in terms for financing, giving the business more time and latitude to pay the debt.  Also, new financing could be obtained to pay off numerous creditors, with the new lender as the sole creditor under a new agreement.


These workout agreements are achieved most easily when creditors understand that the only remaining alternative would be bankruptcy, which could result in a very small payout once assets are liquidated.  By communicating openly with creditors about the financial challenges and potential solutions, a business can maintain a healthy relationship and also arrive at an arrangement that works for both parties.  This is essentially similar to a Chapter 11 bankruptcy organization, that is instead accomplished out of court and with the assistance of an attorney or advisor to assist with negotiations.

2.  Assignment for the Benefit of Creditors

An assignment for the benefit of creditors (ABC) is a bankruptcy-like proceeding that is handled by the state courts rather than the federal bankruptcy court.  It is an alternative to Chapter 7, and is used for businesses that wish to liquidate and close down altogether.  This is a complex and involved process that essentially ‘assigns’ the business assets to a third party ‘assignee’ who then liquidates the assets to pay creditors.  The assignee is similar in function to a bankruptcy trustee, who will sort out the creditor claims, sell the assets for maximum value and then pay the creditors from the proceeds.  Any remaining amounts will be returned to business shareholders.


There is a wide range of scenarios available to the assignee to manage and distribute assets, and generally an ABC can be more flexible in the sale and distribution of certain types of assets.  It requires legal assistance and an experienced and credible assignee to work with creditors and to satisfy the debts completely.


Any of these alternatives to bankruptcy may offer a way to accomplish the same result with less cost and time consuming legal proceedings.  Basically, creditors are looking to receive some type of payment on debt and businesses would like to continue in operations, so those two interests can often be complimentary, rather than contentious.  All that is required is a sound strategy, good advisors and the willingness to communicate and compromise on both sides.  In this way business relationships can be preserved and the good credit of the business will be unmarred.

Bankruptcy is almost always adversarial, and creditors are afraid of not being paid at all for supplies, loans or other financing arrangements.  For this reason, they may be open to alternatives that appear to offer a means toward payment, even if it is delayed or reduced in some way.