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With business bankruptcies skyrocketing, it's easy for seemingly healthy small businesses to get caught up in the so-called cascade effect. Your business may be fine, but suddenly your customers are paying slowly, and then they stop altogether. Eventually you find out they've filed for Chapter 11. That may be good for them, but it's terrible for you. You'll probably get only pennies on the dollar. It could take an exceedingly long time to get paid. Or you might never see payment at all. You could even find yourself filing for bankruptcy or closing your doors.

That was the situation facing Hawthorne Landscape in Spring Grove, Ill. The landscaping company got its start in 2004 and grew dramatically with the real estate boom. Pretty soon, it had ramped up to 60 employees and $5 million in sales. That all changed in 2007, when Mary Joestgen, president and owner, noticed that some of her customers were paying late. Then one developer left Hawthorne with $500,000 in unpaid invoices before filing for bankruptcy protection. That caused Hawthorne to violate the covenants on a $1 million loan, and the bank called the loan. Other customers stopped paying and filed for Chapter 11, too.

Pretty soon Joestgen was maxing out credit cards—to the tune of $120,000—and borrowing from a business mentor. She also racked up about $100,000 in legal fees trying to recover the $500,000 claim. While the bank was willing to negotiate a reduction in the loan, Joestgen still owed around $1 million when her other debts were added in. She simply couldn't pay in full.

"It is frustrating to me how these companies can go bankrupt and just walk away," says Joestgen. "You always think you can get a lien, but after the attorney fees and the interest, it's not that simple; it takes forever." She sold her company's equipment to a competitor in January for $180,000. That money went straight to the bank. Then Joestgen closed her doors.

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