Bankruptcy Option: Just Fade Away : Business: Small companies that are failing often prefer to quietly just quit rather than incur more debts from seeking court protection.

Every now and then, David Ewing still gets calls from people looking for a house painter.

Ewing, 41, painted hundreds of Orange County homes during 17 years in the business, including six years of running his own paint-contracting company in Fullerton.

After operating profitably for years, his business soured in the recession that began about a year ago. He was forced to lay off three employees to cut costs. Finally, last month, he decided to call it quits.

“Business was just terrible . . . ,” he said. “It’s just not worth the trouble anymore.”

Like many of the county’s small companies, Ewing’s company never filed for bankruptcy. It just quietly faded away.

From January to October, 1991, there were 10,412 bankruptcy filings recorded in Orange County. That’s more bankruptcies than in all of 1990, when there were 9,342 filings, according to court records.

If companies such as Ewing’s were included in that tally, says one Newport Beach bankruptcy lawyer, “the body count would be much, much higher.”

While major U.S. corporations often choose to seek bankruptcy court protection from creditors while they attempt to reorganize, small-business owners are often reluctant to do so. Fewer than 10% of bankruptcies in Southern California are filed by small-business owners, said Donovan S. Cooper, a management analyst at the federal bankruptcy court in Los Angeles.

There are a number of reasons why many small-business owners choose to quit business quietly instead of filing for bankruptcy. Among them:

* A bankruptcy filing carries a certain stigma and can pose future credit problems with lenders if the business person decides to revive the company or start a new venture.

* Many small companies cannot afford to file for bankruptcy protection from creditors even if they wanted to.

* Many small-business people borrow from family and friends to start their business. It may be easier for them to work out a debt repayment plan with those people than to have a bankruptcy court do so.

Business experts say one key for small businesses is recognizing when they are in trouble and taking action to do something about it. But that’s often easier said than done.

“(Small-business owners) are the world’s greatest optimists and some hate to admit that they’re getting in trouble,” said George Blanc, director of Community Services and Continuing Education at Orange Coast College. “It’s like a bad marriage--you’re the last one to admit that it’s troubled.”

When business began to sour for Barbara Francis’ interior decorating business, she laid off the firm’s 14 designers one by one. She moved her office from a Fountain Valley shopping mall to her home and transferred tons of samples of wallpaper, bathroom tile and other materials to a warehouse.

Francis concedes that it was difficult to accept the idea that her business was failing. “I wasn’t sure if I wanted to close the business down,” she said. “I thought I might want to open another office when times get better.”

But business was “horrible” even after the move to her home. Two weeks ago, she accepted the inevitable. She gave away the samples to some Orange County community colleges and high schools that offer courses in interior design.

“It’s all gone now, and I don’t have to pay storage fee in the warehouse anymore,” she said, sighing.

Francis, 51, considered filing for bankruptcy but decided she could not afford to do so. Also, her debts were not that substantial, and she was able to work out an agreement with her creditors. Because she hopes to revive her business someday, she also knew that a bankruptcy filing could make that difficult. Meantime, she’s making a living as an interior design consultant.

Business experts say that many small-business owners shun bankruptcy because they are intimidated by the process. Beyond that, bankruptcy court is expensive and many small-business owners simply cannot afford it.

Many small-business owners prefer to use money that would go toward paying lawyers and other bankruptcy costs to pay off creditors instead, said Cole Allen, president of Premium Commercial Services Inc., a Huntington Beach firm that assists small businesses in obtaining financing.

A Chapter 7 bankruptcy liquidation typically costs at least $5,000, while a bankruptcy reorganization usually costs in excess of $20,000, bankruptcy lawyers said.

Eric and Ellen Amey ran a successful Anaheim graphic design company for years. Then, earlier this year, two major customers first delayed payments and then refused to pay at all.

“If the money you’re counting to come in doesn’t show up and you’re operating a small business with limited capital, your business can easily come to a standstill,” Eric Amey said.

In June, the Ameys closed their business after the State Board of Equalization suspended their business license for non-payment of taxes and other fees totaling about $250. For them, a bankruptcy filing was out of the question because they had no money.

“This may not seem a significant amount, but because of the tough economic situation, it is difficult for us to come up with” the $250 in taxes and fees, Ellen Amey said. “We’re living on a hand-to-mouth existence and it’s getting difficult every day.”

Because of their closer relationships with customers, small companies--more so than larger ones--often fear that a bankruptcy filing will scare away customers. Those customers may decide that the troubled firm’s future is too shaky and take their business elsewhere.

Alan J. Friedman, a lawyer with the Irvine law firm Lobel, Winthrop & Broker, notes that when a large corporation files for bankruptcy, customers have a sense that the company is still functioning.

“A big corporation is faceless,” he said. “Customers have the sense that someone is still manning the phone and able to fill the orders.”

From the creditors’ standpoint, it often is not worth the effort to go after a small company when the debt is not significant, said Ian Sharlit, managing partner at Durkee, Sharlit Associates, a West Los Angeles managing consultant.

Why Many Small Businesses Fail:

Business owners have no marketing strategy or business plans that forecast beyond the next 18 months.

Senior management has limited experience in management, market research or budgeting.

Business location selected for the owner’s convenience and does not reflect the area’s income or customer base.

Conflicts arise between business partners about marketing style or strategic direction of the company.

Companies that borrow more than 50% of their operating capital almost always fail.

Sources: Service Corps of Retired Executives and the National Center for the Small Business Institute Directors Assn.

Small Business in Decline After reaching a peak of 77,842 in 1987, the number of county businesses with 50 and feweremployees declined 18% in 1991, to 63,630. Of those companies that ceased doing business in the county, some filed for bankruptcy liquidation, some moved from the county and some simplyceased operations. Meanwhile, the number of businesses with more than 50 workers increased by 14% since 1986, to 2,726. Source: Contracts Influential

Boom in Bankruptcies Bankruptcy filings in the county have nearly doubled since 1985. During the first 10 months of 1991, new filings rose 34% from the same period of 1990 and surpassed the full-year 1990 total. Small businesses account for fewer than 10% of all bankruptcy filings. 1985: 5,588 1986: 7,286 1987: 7,784 1988: 7,680 1989: 8,306 1990: 8,306 10 months 1-10/ 90: 7,760 1-10/ 91: 10,412 Source: U.S. Bankruptcy Court Researched by CRISTINA LEE and DALLAS M. JACKSON / Los Angeles Times