About 50 percent of new restaurants fail, but this does not mean that your restaurant, if experiencing financial problems, should surrender and liquidate its assets.

There are many reasons why restaurant owners suddenly see customers stop coming in or why a busy restaurant should find itself on the verge of failing. As viewers of some popular television shows on failing restaurants have come to learn, a failing restaurant usually comes from poor management, overextended staff, disorganization, too large a menu or lack of fresh food.

Still, a restaurant owner facing lawsuits, liens and lack of cash flow may wish to use the protections and benefits offered by a Chapter 11 bankruptcy. By filing bankruptcy, all collection activities and civil proceedings must cease pursuant to the automatic stay provision in the bankruptcy code. This means that all harassing phone calls, correspondence or visits by frustrated creditors must stop.

Purpose of Filing

A Chapter 11 bankruptcy allows you to keep your business operating, though you will have to answer to a committee of unsecured creditors and in some cases relinquish control to the trustee if there is evidence of gross mismanagement or fraud.

You also have to provide a workable plan within 120 days of filing. Your plan has to set forth a reason how your restaurant will return to profitability. It may include laying off staff, refining the menu, hiring new cooks, new management or other measures, but you must be able to show that a steady cash flow will allow you to pay the restaurant’s creditors on a payment plan.

An empty restaurant will probably not get your plan approved. A repayment plan or debt reorganization may not be viable for your business in this situation since you will need cash to keep the restaurant open.

Do Not Wait Too Long

Waiting too long before filing for Chapter 11 could be fatal to your chances to keep your restaurant in business. If you are having problems paying bills or making payroll, you need to consult with a bankruptcy attorney and perhaps a financial analyst to decide if you can benefit from filing. If you still have enough to pay attorney’s fees and operate the restaurant, then do it before that money vanishes.

Those who own multiple restaurant franchises should be cautioned about waiting too long if they are experiencing cash flow problems. Some of these owners are overextended and would be wise to sell an unprofitable restaurant if possible.

If you do plan to file, you may also wish to contact creditors to let them know. For instance, a lease may be too onerous and rather than vacating the spot or losing what is owed, a new lease can be negotiated that would allow you to keep open and offer some relief while other changes are made.