Donald Trump has filed for bankruptcy four times. None of those times were personal. Recently, Trump stated via 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 in Corporate Bankruptcy Back in its heyday, Atlantic City was the place to be. It was glitz and glam and a money-making machine (kind of like Las Vegas is today). Eventually Atlantic City fell due to time and other factors. In the early 1990s, Donald Trump wanted to reclaim the Atlantic City that once was by building a number of casinos and lavish hotels along the famed boardwalk.
Trump's first foray into reviving Atlantic City was a disaster. His 'Trump Taj Mahal' was financed largely by junk bonds (according Forbes.com), and the failure of the property to bring in revenue caused him to sell his Trump Shuttle Airline and Trump Princess Yacht. Since the investment that did not pay off cost him around $ 900 million in person – not corporate – debt, this was an excellent lesson for Trump.
Declaring corporate bankruptcy for the first time helped him secure his personal fortune while also eliminating the debt from Trump Taj Mahal. After going through that bankruptcy, Trump then went on to declare Chapter 11 three more times. How did he get away with it, and is it a good strategy for every business owner?
Corporate Bankruptcy As Business Strategy Trump was recently quoted as stating, "… basically I've used the laws of the country to my advantage and to other people's advantage." What he means by that is that Chapter 11 can shelter a company from complete destruction. Under the umbrella of corporate bankruptcy, a company that's struggling (as all four of Trump's Atlantic City ventures have) can restructure without the pressure of liquidating assets and making creditors unhappy.
It's a tactic that Trump has made popular largely because of his big persona and brand name, but it's not a strategy that he enjoys and owns alone. Numerous companies have gone through corporate bankruptcy for the same reason – because it's much better than losing money on a sinking ship. Allowing a company to restructure under the Chapter 11 clause will bring in more money than liquidating that company assets, and this is what most creditors want to see.
But can this strategy work for companies that are much smaller in size? Does declaring corporate bankruptcy work for a mom and pop shop? Here's where it gets sticky.
Applying Trump's Strategy to Your Business First, your business has to be registered as a corporation that is separate from your personal name and life (this should really be the first step to opening any business, long before you consider Chapter 11). Once that's 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 not usually be impacted by this decision.
However, there are a lot of different factors that come into play when deciding on Chapter 11. What worked for Trump many times might not work for your company without the right guidance. In some cases, Chapter 11 might not mean that a company owner has zero liability. In other cases, there are better alternatives to keeping a company afloat. On the other hand, Chapter 11 could be part of an early business plan, but there are various details included in that strategy that must be worked out with an attorney prior to any kind of filing.
Declaring Bankruptcy Steps What about for individuals? Bankruptcy for individuals can be viewed as a financial strategy. In many ways, bankruptcy is financial planning when you strip down the details – but, it's important to have a competent bankruptcy lawyer on your side in order to tie up all of those loose ends.
Trump's larger than life character is hard to ignore, and so are his various corporate bankruptcy filings. Every new business owner should have a bankruptcy attorney on speed-dial whenever they are making big financial decisions so that they thoroughly understand the financial implications to the business and themselves and their families.