Talk about a difficult housing market.

Builders waiting to listen to a webinar on the financial impacts of filing for bankruptcy protection yesterday were asked if they’ve recently considered bankruptcy as an option. Twenty-eight percent of the 50 or so builders online responded “yes.”

More significant, though, were the 40 percent who responded “not sure.” That group of ambivalent builders was told that bankruptcy is not for dilettantes, and should be entered into only if creditors can’t be convinced otherwise to cooperate in a restructuring of the builder’s debt.

“The primary purpose of bankruptcy is to get creditors to enter a plan of action” so the company can resolve its financial problems in an orderly fashion, said Jim Weigel of Shinn Consulting, the Littleton, Colo.-based builder-focused consulting firm, who led the webinar. Survival is definitely preying on the minds of the builders who were online, 86 percent of whom said they think the housing industry is “deep into recession,” and half of whom do not expect any improvement in that condition for at least a year.

Weigel presented bankruptcy as a strategic tool that sometimes is just as effective as a threat when negotiating with creditors as an actual bankruptcy filing can be. He pointed out that that fewer than 1 percent of companies that consider filing ever do, and that most companies that liquidate their assets do so without filing. In fact, he recommended against using the bankruptcy code to liquidate because “there are easier and less expensive ways to do that.”

To decide the best course of action, builders need to consult a competent bankruptcy attorney, says Weigel, a point he reiterated several times during the webinar. “This should be the first thing on your to-do list.”

Professional advice can help builders explore options to bankruptcy, and how to get creditors on board, which Weigel contended is a far more palatable outcome than a disruptive and costly legal proceeding that will impact a builders’ customers, trades, employees, lenders, “and yourself.” Indeed, professionals can also help builders get past the “personal psychological” factor that, in their minds, equates bankruptcy with failure and prevents them from taking action until it’s too late to save their companies.

Weigel suggested that the threat of filing Chapter 11 can be just as effective as filing to get creditors to the bargaining table. One other option, Weigel said, might be a prepackaged bankruptcy, where creditors and the builder agree beforehand on the terms of a plan and use Chapter 11 to execute it quickly.

Before they make any decisions, however, Weigel said builders need to reach consensus among their staffs and creditors about their companies’ current and anticipated situation. That consensus should be based on an understanding of the real (and not imagined or hoped-for) value of a builder’s assets, arrived at through a detailed evaluation of each project that would be rolled into the bankruptcy.

Weigel also told listeners that communication with lenders and other creditors, before and during any bankruptcy, is imperative, and recommended that they set up an informational Web site that creditors could access for regular updates.

Unfortunately, the prospects appear to be slim for builders coming out of bankruptcy with a court-approved plan that would allow them to continue as operating entities. Weigel noted how difficult it is for builders to negotiate debtor-in-possession financing, which would allow them to pay bills and build homes while in bankruptcy.

Banks are playing hardball about getting paid in full for loans, Weigel said, because “they care only about their own survival and not the people who have kept them in business all these years. They don’t understand that builders can be their ticket out” of financial problems if, for example, banks would agree to finance the completion of projects that are still selling.

Weigel also cautioned builders about the hazards of personally guaranteeing debt, which during a bankruptcy proceeding will expose an owner’s family assets to seizure by creditors. On the other hand, bankruptcy is likely to become the last option left for more builders if market conditions don’t improve. Weigel cautioned listeners not to expect any bailout of the housing industry from federal or state governments.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Denver, CO.