Book on how to repair bad credit

Scandal greeted Amber Brookman one fine spring morning in May 1988 as the former high-fashion model arrived at her office at Coated Sales, a textile-manufacturing business. Most of the company's top officers had been accused of accounting fraud in the company's headquarters, in New Jersey.

Brookman, also on the board of directors, headed up the marketing and sales division in New York and had no dealings with the financial side of the company. "When it happened, it was like firecrackers going off," she recalls. "Things unraveled very quickly, and within weeks we knew we were in real trouble." One of the few remaining officers at the company, the stunned Brookman had to figure out how to pick up the pieces, financial and otherwise.

Fiscal disaster: it could happen to you Not necessarily because of legal problems, of course. But there are plenty of ways a business can go to hell, fast. Lees say business is thriving, sales are up, and you decide to expand, using personal guarantees as collateral. A few months later the investment firm that promised to handle your stock offering goes belly up, leaving you holding the bag on a half-million-dollar bank loan. Or maybe sales are down, cash flow has turned into a trickle, and you've run out of ways to beat back the creditors. Overnight, your options seem to diminish to two not very good ones: dose the doors or face bankruptcy.

Bankruptcy relief comes in several forms (see "Demystifying Bankruptcy," below), depending on the size of the business, the number of assets, and the of debt But the price is high. You can lose everything; even if you don't, you can still count on your credits being tarnished for years. Your competition takes advantage of the bad publicity, suppliers become gun-shy, and you start losing key employees. Worse, your attention is diverted from running the business to dealing with the bankruptcy.

"Large companies typically set up a task force to mind the business while other executives oversee the bankruptcy requirements," says John Butler, a bankruptcy lawyer at Skadden, Arps, Slate!, Meagher & Flom in Chicago and chairman of the American Bankruptcy Board of Certification. "A small business doesn't have that luxury."

Even though Chapter 11 and Chapter 13 filings are the ones most commonly associated with business bankruptcies, the number of consumer filings by home-based sole proprietors is increasing. Business bankruptcies, about 55,000 by year's end in 1997, have kept pace with the number filed a decade ago. But consumer bankruptcies, typically Chapter 7, are soaring, with a record 1.3 million expected for the same period.

One of the most common causes of bankruptcy is the overextending of those easy-to-get credit cards the banks are practically flinging at you these days. Especially at risk are entrepreneurs, sole proprietors, and people who work from home, all of whom are the ones most likely to use consumer credit to expand their businesses. "This is easy credit, but it's also expensive credit. It's not hard to get overextended," says Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va. "Those who finance their businesses in this manner need to get the best interest rate and be extra sensitive to cash flow and budget adherence." (See Rebuilding Your Credit Rating," opposite.)

While the alarming number of filings has Congress considering reforms to the bankruptcy laws, happily more and more entrepreneurs are finding ways to bounce back after going bust. Some make a fresh start with a new partner or a new company name, says Gerdano. There are even ways to puff back from the bank and avoid bankruptcy altogether. The following business owners did it, and they're here to describe where they made a wrong turn and tell you how they found their way back to profitability.

Take a deep breath, and get back in to the game

It was 1987, AND Tom Schrader's homegrown residential cleaning business, Domestic Aid, was booming. Based in Lincoln, Nebr., his company had 30 locations md sales of $3.5 million. Schrader was itching to launch a national franchise ronout. "I was trying to do a bolder approach to franchising," he says. "I wanted to go really fast and seize the market" When he looked for capital, he found an Omaha-based investment-banking firm willing to construct a private placement offering, or PPO (a stock offering made to a handpicked, highly qualified group of investors).

The firm wanted Schrader to finance $500,000 through his own bank. The investment firm would then buy out the bank's interest within months of the PPO. "I was a little hesitant," says Schrader, who was putting on the the every personal asset he had except for the business itself. "But I was still starry-eyed

He went ahead, personally signing for the loan. Nine months later, the investment firm failed, a casualty of the stock-market crash that year. "I didn't see any way to survive that," recalls Schrader. "I lost everything -- the house, the car. There were times I didn't know how I was going to put milk on the table for our 4-year-old We bottomed out entirely." As the family's provider, Schrader says, he felt "like a failure, frightened and inadequate, with constant nausea in the pit of my stomach."

He was the only one hit by the investment firm's failure. The corporation that was Domestic Aid was not affected, and the franchisees bought the business.

Schrader's comeback was slow and steady. He took a deep breath and began borrowing money from friends. How did he convince them he was a good risk after everything that had happened? By keeping his emotions out of the presentation. "You put the financials down on paper and point to what went wrong and where you intend to go from there," he explains. In six months Schrader raised enough cash to start a new cleaning business, and in 1988, CottageCare was born. A year later the company sold its first franchise, and by 1997, with 42 franchisees nationally, system-wide sales topped $7.5 million. What Schrader learned:

* Don't grow your business too fast. Better to take it one step at a time than get greedy md overextend yourself. Schrader also realized that other members of the organization, not just the chief, should experience the risks of that growth.

* When the worst happens, put all your energy into keeping your emotions under control, and don't beat up on yourself too much. Scrader says it helped to share his feelings of desperation with trusted family members and friend, rather than trying to disguise how tough things were. That way, everyone immediately affected by the bankruptcy was the same page, and Schrader didn't suffer the added stress of attempting to hide his fears from the people he loved most.

* Learn from the experience, and ...

* Don't be afraid to start over, because what you've learned can really make a difference a difference in your next effort

Use bankruptcy to buy some time

Marketing Director Amber Brookman of Coated Sales was facing disaster. Since she had no financial background, Brookman hired professionals to dive into the beleaguered textile company's battered books and look for ways to cut costs. One month after the allegations of fraud shattered her world, she and a lawyer put the company under Chapter 11 bankruptcy protection in order to reorganize.

Chapter 11 places the business in die protection of the bankruptcy court for a period of time while the company tries to find new financing, see its assets to a buyer, and make changes to its management structure so that it can emerge from the court protection as a viable business. Creditors are put in a holding pattern while a payment plan is worked out.

Although a Chapter 11 bankruptcy can give you some breathing space, it's highly unlikely that everything will return to normal after the ordeal. On the contrary, most Chapter 11 bankruptcies cause die business in question to "change substantially in order to remain alive," notes John Butler.

"We looked around for a buyer, closed down divisions, cut back expenses, and worked through the bankruptcy," Brookman says. "It was depressing, embarassing, and frightening."

In 1989 the assets of Coated Sales were bought by Hallwood Croup Inc., a Dallas-based holding company. The manufacturing company was relaunched as Brookwood Companies, with Amber Brookman as president and CEO. Sales in 1997 were expected to hit $87 million.

"We stayed the course through the crisis, and as good a situation as possible has come out of it," she says. Namely, a lot of die good people have stayed."

What Brookman learned:

* Get a great bankruptcy attorney. Check with your state bar association for a recommendation in your area, or visit your library for a copy of the book The best lawyer 5 in America, published by Woodward White in Aiken, S.C.