The Agony of Closing a Sinking Business

Q: I retired a few years ago and invested my retirement fund in a restaurant business. My husband and I refinanced our home and sold our boat and rental properties to help finance the venture. We have almost maxed out our $90,000 credit lines to keep the business afloat. Our home, once appraised at $890,000, is now valued at $450,000. The restaurant was nominally profitable last year, but I expect a substantial loss this year because we have been getting by on credit. I feel a tremendous responsibility to my employees, given that I am their sole source of income. All my part-time employees have opted to decline medical coverage to help me save money, but I don't know how much longer I can provide benefits to the full-timers. My husband and I are torn about whether to keep the restaurant open and try to ride out the debt, declare bankruptcy, or walk away from our home and the business.

A: I know your heart is heavy, and I admire your sense of responsibility to your employees, but postponing the inevitable is not responsible. And yes, I believe it is inevitable that you will close the restaurant. First, take a step back and assess what will happen if you do try to sweat things out for another year. Do you expect that the economy in your area will rebound quickly and allow you to swing back to a profit? If the answer is anything short of "Absolutely, positively," then you need to make the tough decision to shutter the business now. If you do not, the bank will make it for you. Banks and credit card companies are treating small businesses the way they're treating individuals: They're slashing credit lines on those they think can't continue to pay the bills. So even if you keep the restaurant open, your creditors will very likely pull the plug on you soon. And when that happens, watch out. In the process of cutting you off, they will probably jack up the interest rate on the debt you already owe. Also, there is a bigger issue at play here. If you saddle your bank with more bad debt by trying to stay open, you are potentially asking your fellow taxpayers to foot the bill for your failure. The federal government is forking over billions of dollars to banks teetering on mountains of bad debt; that's money that in one form or another will eventually come out of the taxpayers' pockets. Consider your role in all of this, and act responsibly. I respect that this is a wrenching decision for you, but please recognize that the first step in getting out of a big hole is to stop digging it any deeper. Closing the restaurant doesn't mean you are being cavalier toward your employees; they know the efforts you've made to stay in business. Now it is time to face facts and do what is right.

Suze Orman's most recent book is her 2009 Action Plan: Keeping Your Money Safe & Sound (Spiegel & Grau).