Despite downturn, few businesses file for bankruptcy

Between Feb. 1 and late March, 799 cases were filed in federal bankruptcy court in Reno.

Only 24 of them 3 percent of the total involved businesses, and barely more than half of those businesses were seeking to reorganize under Chapter 11. The rest were seeking the court's protection while they liquidated.

As many business owners struggle to survive the worst economic downturn in decades, why are so few of them filing bankruptcy in northern Nevada?

Probably, bankruptcy specialists say, because they can't afford to and there's not much point to it anyway.

Reorganization under Chapter 11 requires small businesses to bring $25,000 or $30,000 to the table up front, says Kaaran Thomas, a partner with the law firm McDonald Carano Wilson in Reno who focuses on bankruptcy and business reorganization.

"How many people have that kind of cash laying around?" Thomas asks.

For larger corporations that are weighing a Chapter 11 filing, the same tight credit markets that brought them to their knees can present problems to a bankruptcy filing, says Bruce Beesley, who leads the bankruptcy practice group as a partner in the law firm of Lewis and Roca.

Those companies often line up debtor-in-possession financing before they head to bankruptcy court. But it's sometimes tough these days, Beesley says, to find a bank that will provide debtor-in-possession lending.

Another headache, Thomas says, is this: Reorganization under Chapter 11 can be stymied by even a tiny group of creditors who oppose the company's plan to emerge from bankruptcy protection.

Reorganization is all the more difficult if the list of creditors includes failed banks whose loans have landed in the lap of the Federal Deposit Insurance Corp.

"They're overwhelmed with cases," Thomas says. "Getting someone's attention is very difficult."

Given the costs and hassles of bankruptcy court for debtors and creditors alike, some lenders are seeking other options such as receiverships to resolve defaults, says Beesley.

Business owners, meanwhile, are looking for options such as short sales, hoping to convince lenders to settle for less than the full amount they're owed.

But that depends on finding a buyer for a troubled business, Thomas says. That's a problem, too, for business owners who hope to liquidate under the protection of a bankruptcy court.

Counterintuitive as it may sound, an increase in Chapter 11 filings is likely to be one of the signs that the economy is beginning to turn, Thomas says.

More filings will indicate that business owners think that financing has thawed enough and business conditions have improved enough to justify the work involved in reorganizing a business.

But until then, she says business owners are far more likely to lock the doors and walk away.

"You don't need to go bankrupt to go out of business," Thomas says.

SIDEBAR

When business becomes personal

The number of bankruptcy court filings from businesses is relatively small, but some filings by individuals and couples probably reflect business failures as well.

Small business owners usually are required to personally guarantee bank loans to their businesses or have financed businesses through personal credit cards or home equity loans.

That means that a failed business can tip its owners into personal bankruptcy.