When Evaluating A Small Business’s Situation, What Are Some Of The Most Important Questions You Ask To Determine How To Advise The Business Owner On What The Next Best Steps Might Be?
I begin by first getting a sense of what the business owner’s goals are.
Sometimes a business owner will call and complain of large amounts of debt with no visible way out, but state that if the business were given a fresh start, it could work.
Therefore, we must discuss the debt profile to determine the best course of action. If we are dealing with a small business, we could put the business into a subchapter V bankruptcy, which is subchapter V of chapter 11. Using either a standard Chapter 11, or a Subchapter V Chapter 11, assumes the business wants to continue operating. Subchapter V is a streamlined version of Chapter 11, so it’s a bit simpler and less expensive. However, Subchapter V has a debt ceiling. The debt ceiling is normally $2,725,625, but it has been temporarily raised to $7. 5 million. Since Subchapter V is less complicated than a standard Chapter 11, as long as the business doesn’t have too much debt, we’ll think in terms of subchapter V.
We also want to get a sense of the business’s revenue streams. If we’re going to put the company into a reorganization — either a standard Chapter 11, or a Subchapter V Chapter 11 — and do not have the revenues to support the plan, it will be very hard to get the plan confirmed by the judge. This ultimately leads to the endgame, which is determining the bankruptcy exit strategy.
If the business is throwing in the towel, the court will appoint a Chapter 7 trustee to administer the case. The trustee will take all of the business’s assets and liquidate them to pay the creditors. Once the creditors have been paid, the Court will close the case without granting the business a discharge because businesses are ineligible to get a Chapter 7 discharge. If the business has been fully liquidated, there is no point in a discharge because the business ceases to exist. It is very important to note that even if the business could get a Chapter 7 discharge, it would not absolve the business owner of any personal liability.
Generally, although Chapter 7 is more complicated for a business than Chapter 7 for an individual or a married couple, it’s not as complex as a reorganization. In reorganizations, a business can either do a standard Chapter 11 case, or do a Subchapter V chapter 11 case, if it’s a small business as understood in the Bankruptcy Code.
If the business is going to reorganize, it needs an exit strategy. Therefore, another question I will ask is if any of the creditors are more of a problem than the others. Sometimes, creditors are willing to work with the debtor, and maybe we can craft a plan even before filing the bankruptcy paper, something called a pre-packaged plan, that can streamline the process. But sometimes, creditors will not cooperate under any circumstances and are out for blood. I have a Chapter 11 case in which the Court recently confirmed the plan, and in which some creditors have been uncooperative from the beginning. Sometimes the only way to resolve things is to go into court and litigate the matter until we fix the issue. This will also help budget the time I allocate to each case.
Another question that comes up is, “What sort of personal guarantees did the business owner sign?” While the business may reorganize, unless the creditors are being paid in full through the reorganization, the unpaid portion may leave liability to the business owner. We need to ensure that the business owner has a clear picture of the consequences of putting the business into bankruptcy.
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