Three Ways to Avoid Going Bankrupt

In all the hang-wringing over General Motors'(GM Quote) bankruptcy, we heard a lot of sympathy for soon-to-be unemployed suppliers and dealers. But did anyone spare a thought for those poor, exhausted bankruptcy court judges? Their workload has skyrocketed in 2009, and it looks like they'll remain buried in paperwork for some time.

Across industries, from travel to real estate to retail, businesses large and small have been declaring bankruptcy with disconcerting regularity. While each company's situation differs in the specifics, there are some common underlying mistakes that left each with no other option but to admit defeat. To prevent your own company from making a similar trip to court, it pays to look where they went wrong.

1. Don't judge the future by the past: In theory, it makes sense to be optimistic about your business. When drawing up a five-year plan, why shouldn't you assume that sales will continue to rise each year, along with revenue?

The trouble comes when those projections don't pan out. One of the most common precursors to bankruptcy is debt: huge loans that a company expected to repay using future revenue. (Just like all those homeowners who thought their home's future value would shoot up higher than their massive mortgage.) But what happens when business dries up right around the time the loans come due?

That's the dilemma faced by hotel chain Extended Stay. A year ago, a real-estate investment firm took on $7 billion in debt to buy the chain from the private equity firm Blackstone Group(BX Quote). Talk about bad timing. Within months of the sale, the economy crashed. Business travel dried up, which meant occupancy rates at Extended Stay's almost 700 properties dropped, too.