Proper Help For Troubled Businesses

by Ian C. Perry and Roman A. Basi – Basi, Basi & Associates | Published February 2025

 

 

The reports of restaurants and retailers entering into bankruptcy continue to multiply. Bankruptcies are also on the upswing among pressure washing businesses. Fortunately, the options for troubled businesses aren’t limited to bankruptcy, even with the new bankruptcy program aimed at smaller businesses.

Bankruptcy is a legal process for dealing with overwhelming debt through liquidation or reorganization designed to give the business a “fresh start.” Despite its negative reputation, however, bankruptcy can often mean a new start for any troubled business.

 

Bankruptcy 101

The specific bankruptcy options available depend on the pressure cleaning operation’s legal structure and, of course, whether the owners, partners, members, or shareholders want to continue operations.

A pressure cleaning business may operate as a sole proprietorship or under a separate legal structure such as a corporation or limited liability company (LLC). The critical difference is that a sole proprietor is personally liable for any business debts since there is no legal distinction between the individual owner and the business.

In contrast, a corporation or LLC is a business entity that exists separately from the owner—even if they’re the sole shareholder or member.

Both individuals and business entities can use Chapter 7 bankruptcy, the so-called “liquidation” bankruptcy, where a court-appointed trustee takes possession of the debtor’s assets, liquidates them, and uses the proceeds to pay off creditors as much as possible. The bankruptcy court will then usually discharge the remaining debts.

With Chapter 7 bankruptcy, businesses, corporations, and LLCs cannot use any exemptions. Thus, a sole proprietor who files for Chapter 7 may still be able to protect some business assets through personal exemptions while an LLC must liquidate everything.

Chapter 11 can be used by both individuals and business entities and is designed to facilitate the reorganization of businesses. While admittedly among the most complicated to use, when a business or individual files for Chapter 11 bankruptcy, debts are restructured and a repayment plan is worked out. But, most importantly, the debtor’s assets are protected to prevent them from being sold off to pay off creditors.

Chapter 13 is only available to individuals, not business entities. A sole proprietor can keep all of their assets under Chapter 13 while submitting a repayment plan to the court for dealing with any outstanding debts. In some cases a debtor must use Chapter 13 because they have too many assets to qualify for Chapter 7.

 

Recovering Via Subchapter V

Subchapter V is a streamlined, small business version of Chapter 11 bankruptcy. It was created by the Small Business Reorganization Act (SBRA) of 2019 and designed to offer a faster, cheaper way for individuals and small businesses to reorganize, keep control, and reduce their debt by eliminating creditor committees and streamlining confirmation of the plan, with a trustee guiding the process.

The debt limit for those taking the Subchapter V path was reduced last year to about $3,424,000, making it harder for bigger businesses to qualify. However, instead of slowing the program’s growth, the number of filings has increased. Eligible pressure cleaning businesses will find that Subchapter V offers the following:

* A streamlined process—It is faster than traditional Chapter 11, with shorter deadlines for filing plans (often within 90 days).

* Debtor-friendly plan filing—Only the debtor can propose a plan, and it can be confirmed without unanimous creditor consent (unlike standard Chapter 11.)

* No creditor committees—It eliminates the costly and time-consuming requirement for unsecured creditor committees.

* Subchapter V trustee—A trustee is appointed to work with the debtor and creditors to facilitate a consensual plan, unlike typical Chapter 11 cases and,

* Retention of ownership—Equity holders can retain ownership if the plan is fair and equitable.

 

The Downside to Bankruptcy

Although a hit on the reputation of a business (or individual) working things out via bankruptcy is long past, there are quite a few negative consequences, including the following:

* Credit damage—Business bankruptcy (Chapter 7 or Chapter 11) severely lowers business credit scores and makes access to bank loans, vendor credit, and favorable financing terms difficult for years. Personal credit may also be affected if debts were personally guaranteed.

* Loss of assets—In liquidation (e.g., Chapter 7), most of a business’s assets are sold to pay creditors. Even in reorganization, assets may be encumbered or sold as part of a plan.

* Contractual consequences—Contracts, leases, and licenses can be rejected, terminated, or altered in bankruptcy. Landlords and suppliers may demand immediate cures or accelerate obligations.

* Tax consequences—Bankruptcy can create taxable income (e.g., cancellation of debt income) unless exceptions apply.

* Administrative and legal costs—Bankruptcy is expensive—attorneys, administrators, trustees, accountants, and court fees add materially to costs and can consume resources.

* Business disruption—Creditor actions pause or accelerate operations; customers, suppliers, and employees may lose confidence, causing order cancellations, supply refusals, and staff departures.

* Termination of lines of credit and insurance— Lenders typically call loans or stop further advances; insurance providers may change terms or cancel coverage, and

* Difficulty obtaining vendors and customers—New trade credit is scarce; customers may avoid firms in bankruptcy, especially B2B clients who need stability.

 

More Palatable Alternatives

Obviously, there are other options for achieving debt relief. But, it should always be kept in mind that the primary goal of any debt relief program is to help the business manage, reduce, or eliminate its debt.

Every pressure washing business owner must understand the full range of debt relief options available—especially those that can be pursued before resorting to more drastic debt measures of bankruptcy programs such as Chapter 7, Chapter 11, Chapter 13, or even Subchapter V bankruptcy. Among the alternative options are the following:

* Debt restructuring—Debt restructuring involves negotiating with creditors to alter the terms of the debt. For example, they may be able to extend the repayment period, secure a lower interest rate, or even reduce the principal amount owed.

* Debt consolidation loans—Debt consolidation loans are used to combine multiple debts into one loan and to make one monthly payment. Yes, loans. Debt consolidation loans are often available with favorable interest rates.

* Debt management plans—Debt management plans (DMPs) are often administered by credit counseling agencies to help businesses get debt relief. These plans help small businesses create a structured repayment plan to pay off debt over a specified period, usually with lower interest rates negotiated by the agency.

* Negotiating payment plans with creditors—Many business owners negotiate directly with creditors to create new payment plans. Creditors may be willing to extend payment terms, reduce monthly payments, or lower interest rates if it increases the likelihood of being repaid.

* Equity financing—Raising capital through equity financing involves selling shares of the pressure cleaning business to investors. This can provide a significant influx of cash without increasing debt, but it does dilute ownership and may involve giving up some control over the business.

* Government assistance programs—Various government programs offer grants, low-interest loans, and other financial assistance services to help businesses manage debt.

Programs offered through organizations such as the Small Business Administration can provide favorable terms and help any business experiencing financial difficulty. There is also the do-it-yourself approach to debt relief.

 

Home-Grown Debt Relief

Any pressure cleaning business facing financial difficulties might benefit from cutting costs. That cost-cutting might include moving to more affordable premises, laying off staff, reducing expenses, switching to more affordable utility providers, selling unused equipment, negotiating a lower rent on your existing premises, etc.

Selling any non-essential business assets can generate cash to pay down debt. This might include selling equipment, real estate, or other valuable assets that are not critical to the core operations of the business.

 

Reorganization

Would the pressure washing operation benefit from reorganization, or should it be liquidated?  Reorganization can’t create a market, increase gross revenue, or make up for a poor fit between the skills available and the skills required to operate the business.

Reorganization under the bankruptcy laws could, however, free up cash from servicing the old debt to permit current operations, permit rejection of restrictive or expensive leases or contracts that are no longer advantageous, or prevent the loss of vital assets or cash to a creditor.

This relief could go a long way toward paying taxes or unpaid salaries while sale of the business could provide ongoing jobs for the work force under new ownership.

 

In the End

Ignoring the debt piling up is never a solution to the problem. Some debt relief plans can provide a business with a viable path towrd rescue and repaying debt over time. If, however, debt relief can’t be achieved with cost cutting or other do-it-yourself alternative options, bankruptcy may be the answer.

Like it or not, bankruptcy remains an option that can provide breathing room to reorganize and create a plan to move forward to profitability. Despite its negative connotation, filing for bankruptcy may be the best course of action for any debt-ridden pressure cleaning business—or its owner—to take.