For professional photographers, optimism is both a job requirement and an occupational hazard. If you didn’t believe your work was worth money, you wouldn’t go into business. But get too optimistic—buy costly equipment, hire too many employees or count too heavily on one or two big clients and never-ending economic boom times—and you could find yourself staring bankruptcy in the face. Current economic conditions will almost certainly push a number of photographers to the brink.

Bankruptcy no longer has the stigma it once did, but it’s still a last resort, says Joel Hecker, an attorney with Russo & Burke in New York who represents photographers and artists. “It’s a last resort because of what’s at stake,” Hecker says. That includes your tangible assets (such as equipment), intellectual property (such as copyrights), accounts receivable and credit rating. Assets considered part of a bankruptcy “estate”—those available to be liquidated to help repay creditors—are subject to many variables, including how your business is set up, the state you live in and the type of bankruptcy claimed. In any case, it’s a painful process that usually requires an attorney’s advice.

But it isn’t the end of the world. “Although the bankruptcy will take most of the photographer’s physical and financial assets, it won’t take what are probably the most valuable assets,” says Richard Halperin, an attorney with the New York firm McGlaughlin & Stern who also represents photographers and artists. Those assets include your photographic skills, contacts and personal relationships with potential clients. “And bankruptcy is not a crime,” Halperin adds. “It’s a right provided for in the U.S. Constitution.”

Even if you’re deeply in debt, however, bankruptcy is not inevitable. There are proven ways to buy time, save some hassle and protect your reputation.

1.    Take Stock
First, appraise your situation frankly. You may be better off—or worse off—than you thought.

The term accountants use to measure a company’s liquidity is “working capital,” which means current assets (including receivables due within a year) minus current liabilities (including obligations payable within a year). If the result is negative, you’re in trouble, says Lou Biscotti, C.P.A. with Biscotti, Toback & Company, an accounting firm in Garden City, New York that works with many photographers.



“If the [asset to liability] ratio is one to one,” he says, “it means you have just enough assets to cover your liabilities, so that’s not a good sign.” (A two-to-one ratio is considered healthy).

If your debts are too high relative to your assets, pinpoint the source of the problem because you may be able to fix it.

“A key question is how did the debt problem arise?” Halperin says. “If it arose because of a health problem that’s now cured, then it can be eliminated as a (hopefully) one-time occurrence. If it arose because of an expensive conversion to digital equipment but the jobs keep coming in, then if the profits are sufficient to pay off the debt, the photographer should keep plugging.”

On the other hand, if you lack enough work to chip away at your debt, the decision is harder, Halperin explains. Another issue to consider is how the economic climate is affecting your clients. If they’re cutting back (and many clients are right now), are you able to weather some down time? Those aren’t questions you should try to answer on your own, Halperin says. He suggests you talk to people who know you and your industry. “Often the best person to help with the analysis and prevent unbridled optimism is an honest friend with business experience or an accountant.”

An accountant may be able to identify a key problem by looking at your books for a couple of hours. Maybe your overhead is too high for your income, or you’re not billing promptly. Or maybe you’ve accepted a prestigious editorial job without negotiating an advance against expenses.

If your objective analysis reveals that your future earning power falls short of routine expenses, it’s time to change the way you do business. Look for ways to cut your costs. Do you need to keep an assistant on the payroll, or would you be better off hiring freelancers? Can you afford to rent a studio by the month, or could you make do with renting by the day? Or could you share a studio with someone? Could you rent some equipment instead of buying it? Could you sell seldom-used equipment to raise cash?



2.    Start Talking

If you’re convinced that no amount of cost cutting will solve your problem, start talking to your creditors. You’ll generally have better luck if you own up to the problem and try to fix it, rather than waiting for creditors to start hounding you.

Visit a banker. Credit is extremely tight these days because of the worldwide financial crisis. But you may be able to negotiate a loan to repay current debts and consolidate them in one payment to the bank. Or, if you’re behind on a current bank loan, your banker may agree to restructure it—that is, allow you to make smaller payments over a longer period of time. Of course, this assumes that you can demonstrate to the banker’s satisfaction that you will generate enough income in the future to cover the loan payments.

A word of warning: Banks typically ask for some collateral to “secure” the loan—often a personal asset, such as real estate or stocks. If you default on the loan, the lender is entitled to the value of whatever you pledged.

Don’t neglect small-business lenders, such as the federal Small Business Association, which guarantees loans made through banks. If you qualify (visit www.sba.gov for eligibility requirements), SBA loans can be a boon. Because of the agency guarantee, these loans offer lower interest rates and extended terms. Businesses owned by women or minorities may qualify for special programs.

Until the credit crisis hit, one of the least expensive and quickest ways to obtain cash was a home equity loan. Those loans provided cash up to an amount equal to the difference between the market value of your house and what you owed on your original mortgage. (Home equity loans are in effect new mortgages that “buy out” your old mortgage, with your house as collateral against a default).

Home equity loans are now scarce because easy credit resulted in millions of defaults, drying up the credit markets and causing a collapse in real estate values. Many houses are now worth less than the mortgages people owe, so there’s no equity that the owners can borrow against. But if you have equity you can borrow against and you do manage to talk a bank into giving you a home equity loan, beware: this type of loan puts your house at risk if you default. So don’t borrow more than you need and be sure you can generate enough business to meet the repayment schedule.



As you try to raise cash, you should also be talking to your vendors. You may be surprised at how accommodating they can be. Say you owe the photo lab $25,000. Ask if you can extend payment from the usual 30 days to 60 or more. If you’ve been a good customer in the past, the lab will probably want to keep you as a customer and may go out of its way to be even more lenient than you asked. “Vendors will always support you if you have good, open communication with them,” Biscotti says.

If your assets are puny relative to your debt—for example, $20,000 in assets and $50,000 in debt—bankruptcy benefits no one. “At that point, just try to work it out,” says Hecker. Explain what he calls “the facts of life”—that there will be nothing to collect, even if a creditor sues you for nonpayment and the court decides in his favor. “Most creditors realize it’s better to collect something over a period of time than nothing,” Hecker says. You might even draw up a worksheet outlining your assets and debts to show creditors your situation.

One fairly common transaction is a “creditor settlement.” The debtor—usually through an attorney or accountant—proposes a one-time payment, generally a certain percentage of what’s owed, and the creditors agree to forgive the rest. For this to work, “you need good relationships with your vendors and open communication, and you need to fully describe to the vendor why it’s in his or her interest to accept something like this,” Biscotti says. Creditors won’t settle unless they are convinced that the proposed figure is more than what a bankruptcy would generate.

It’s at times like this that you realize the importance of a friendly relationship with your bankers and vendors. It’s human nature to help a friend. “If there’s an established relationship, you’re more likely to get some kind of concession, especially the first time,” Halperin says.

One creditor—the Internal Revenue Service—almost never compromises, so whatever else you put off, don’t fail to pay your income and employment taxes. Even if you’re incorporated, you’re personally liable for federal taxes, and bankruptcy is no way around obligations to the IRS.

3.    If All Else Fails

Unpaid creditors get impatient. As a photographer and a creditor yourself, you know the tactics that escalate from the pleasant phone call to the stern letter to the face-to-face demand for immediate payment. The creditor’s ultimate tool is a lawsuit.



Creditors who sue to demand payment can force what’s called an “involuntary” bankruptcy. A person who knows himself to be in trouble, however, would do better to file before creditors force it. Voluntary bankruptcy, as this is called, is much more common, and at least provides a modicum of control in a bad situation, enabling you to choose the option you believe most suitable.

In most cases, you’ll need a lawyer. You want someone on your side who knows bankruptcy and your industry intimately. Check with your accountant or local bar association for recommendations, and interview two or three attorneys to find one you’re comfortable with. Beware of promises that sound too good to be true, and stay clear of attorneys who won’t take time to answer your questions frankly.

Although bankruptcy is nothing to take lightly, “sometimes it’s unavoidable and sometimes it’s necessary and sometimes even desirable,” Hecker says. “I’ve had some clients we’ve taken through bankruptcy, wiped out their debt and let them start over.”

Take the case of a photographer we’ll call Tom Jones. Jones dissolved one failing corporation—let’s call it Tom Jones Photography—established another and resumed business as, let’s say, Jones Commercial Photography. In both cases he is the sole stockholder, but because it was the corporation that went bankrupt and he hadn’t personally guaranteed any of its loans, he wasn’t personally liable for its debts. As long as there is no intent to defraud anyone through such an arrangement, it is likely to be acceptable to a court.

It’s important to note, however, that a change in the federal bankruptcy laws in 2005 made it more difficult to simply wipe out debt, particularly credit card debt, by filing for bankruptcy. The amendments, enacted under intense lobbying from credit card companies, requires bankruptcy courts to determine whether a debtor can repay at least a  minimal portion of the debt over five years. If so, the court may deny a Chapter 7 filing (which wipes out debt) and instead require a Chapter 11 or Chapter 13 filing (both of which restructure your debt to make it more manageable—see sidebar for details).

If you are eligible to have your debt wiped out, though, don’t expect to do it and start anew without sacrificing some assets. In a corporate bankruptcy, the corporation’s assets are at risk, while personal assets of the owners are not (unless those personal assets have been used as collateral for a loan, or owners have personally guaranteed a loan). In a personal bankruptcy, though, you could lose any or all of what you own—bank accounts, cars, boats, stocks, real estate, even the equipment on which your business depends. In many states, some assets are exempt. Your home—or at least a portion of its value—is among them, so you are unlikely to be thrown out onto the street. Most assets are not exempt, though, and they get lumped together as your “bankruptcy estate” and auctioned off.



“One of the biggest problems for a photographer going into bankruptcy is the potential of losing copyrights,” Hecker says. Copyrighted works are usually considered non-exempt assets in a bankruptcy filing. That means they are likely to be sold off as part of your bankruptcy estate. To avoid that, photographers have arranged in some cases for a friendly party to purchase their copyrights for a nominal fee prior to the bankruptcy filing. Then the photographers buy the copyrights back after bankruptcy proceedings are completed. If your business is incorporated, then registering your copyrights personally, instead of through your corporation, generally puts them out of reach of the corporation’s creditors.

In sum, bankruptcy has plenty of disadvantages, but it does offer financially troubled businesses a second chance. It also provides and opportunity to learn from your mistakes and live within your means. “I’ve had many customers come out of bankruptcy, go on to form another business and become wildly successful,” Biscotti says, “but it stays with you a very long time, and it can hamper your ability to get credit. That’s not to say you’re dead—people do realize mistakes are made in business.”

SIDEBAR
The Five Types of Bankruptcy

There are five types of bankruptcy, three of which are relevant to photographers. (The others have to do with farms and municipalities.) Although the bankruptcy law is federal, state provisions also apply, and each type involves many complexities. And, it’s important to note, bankruptcy doesn’t exonerate you from every debt. Taxes and alimony, for example, usually remain.

Chapter 7 (liquidation), a common form of bankruptcy, is used to obtain protection from creditors while wiping out debt. This type is the choice when you want to fold the business. Any type of entity may file—sole proprietorship, partnership, corporation or limited liability corporation (LLC). The debtor may keep certain assets such as a primary residence, subject to limits; the court liquidates the rest and distributes the proceeds among creditors. With certain exceptions, the bankruptcy discharges all debts that haven’t been secured by the pledge of some asset.

The other two common types of bankruptcy are forms of reorganization, providing protection while debts are restructured and allowing more time to repay them. 

Chapter 11 enables a sole proprietorship, partnership, corporation or LLC to keep operating while consolidating its debts and repaying creditors over a longer period of time through a court-approved plan. When you file for Chapter 11 you receive immediate protection from creditors for 90 days while you work out your plan. Creditors vote on the plan, but the bankruptcy judge has the final say. Chapter 11 is expensive and it is no panacea; more than 90 percent of businesses that file for Chapter 11 fail to keep going and end up being liquidated under Chapter 7 after all.

Chapter 13 is available only to individuals, although a sole proprietor may file as an individual and include business debts. The debtor must propose a repayment plan for some portion of the debt over a specified time, usually three to five years. The remaining debts aren’t discharged until the payment plan is completed.