Is bankruptcy a good business? Lessons Learned from Donald Trump
Donald Trump has filed for bankruptcy four times. None of those moments were personal. Recently, Trump declared through Twitter and other sources that corporate bankruptcy is a good business strategy. Is this really true? Here’s a closer look at Trump’s Chapter 11 past and why it worked.
Atlantic City: A Good Lesson on Corporate Bankruptcies In its heyday, Atlantic City was the place to be. It was glitz and glamor and a money-making machine (sort of like Las Vegas is today). Finally, Atlantic City fell due to weather and other factors. In the early 1990s, Donald Trump wanted to reclaim Atlantic City that it once was by building several casinos and luxurious hotels along the famous boardwalk.
Trump’s first foray to revive Atlantic City was a disaster. His ‘Trump Taj Mahal’ was financed largely by junk bonds (according to Forbes.com), and the property’s inability to generate income caused him to sell his Trump Shuttle Airline and Trump Princess Yacht. Given that the unworthy investment cost him about $ 900 million in person, not in corporate debt, this was an excellent lesson for Trump.
Filing for corporate bankruptcy for the first time helped him secure his personal fortune while eliminating Trump Taj Mahal debt. After going through that bankruptcy, Trump declared Chapter 11 three more times. How did you get away with it? Is it a good strategy for all business owners?
Corporate Bankruptcy as a Business Strategy Trump was recently quoted as saying, “… basically, I have used the laws of the country to my advantage and the advantage of other people.” What he means by that is that Chapter 11 can protect a business from total destruction. Under the umbrella of corporate bankruptcy, a struggling company (as Trump’s four Atlantic City companies have done) can restructure without pressure to liquidate assets and leave creditors unhappy.
It’s a tactic Trump has made popular in large part because of his great personality and brand name, but it’s not a strategy he enjoys and owns alone. Numerous companies have gone through corporate bankruptcy for the same reason: because it is so much better than losing money on a sinking ship. Allowing a business to restructure under the Chapter 11 clause will make more money than liquidating that business’s assets, and this is what most creditors want to see.
But can this strategy work for companies that are much smaller? Does filing for corporate bankruptcy work for a family store? This is where it gets sticky.
Applying Trump’s strategy to your business First, your business must be registered as a corporation separate from your personal name and your life (this should be the first step in starting any business, long before you consider Chapter 11). Once this is done, you may be a good candidate for corporate bankruptcy if your business is not doing well and you want to restructure. Since a Chapter 11 filing is completely separate from personal bankruptcy, your personal assets will generally not be affected by this decision.
However, there are many different factors that come into play when deciding on Chapter 11. What worked for Trump many times may not work for your company without the proper guidance. In some cases, Chapter 11 may not mean that a business owner has zero liability. In other cases, there are better alternatives to keep a business afloat. On the other hand, Chapter 11 could be part of an early business plan, but there are several details included in that strategy that should be worked out with an attorney prior to any type of filing.
Steps to File for Bankruptcy What Happens to People? People’s bankruptcy can be seen as a financial strategy. In many ways, bankruptcy is financial planning when the details are removed, but it is important to have a competent bankruptcy attorney on your side to tie up all those loose ends.
Trump’s larger-than-life character is hard to ignore, as are his various corporate bankruptcy filings. Every new business owner should have a bankruptcy attorney on speed dial every time they make important financial decisions so they fully understand the financial implications for the business and for themselves and their families.