What Is Your Experience In Guiding Businesses Through Financial Difficulties?
I didn’t become a bankruptcy attorney to just sit and twiddle my thumbs: I did it to help people. I believe that giving people who have very large debts an opportunity for relief and an avenue for once again becoming productive members of society can only be a good thing — for the individual person or business who benefits, and for the country as a whole.
At first, this sentiment may seem a little counterintuitive. Readers might be thinking, How could it be a good thing for the country when people don’t pay their debts in full? In my opinion, the key to understanding bankruptcy’s benefits to the country is the fact that it affords people the opportunity to take risks. Entrepreneurs will not take risks if they know that one false move will put them on the wrong side of history. Consider countries like North Korea and Cuba, which have no option for relief when things go wrong; no one sees great new businesses starting in those countries because no one wants to take the risk of starting one. The United States, on the other hand, has a bankruptcy system in place so that entrepreneurs are encouraged to take risks that could lead to great rewards — rewards like Apple and Microsoft.
Sometimes a new business venture doesn’t work out. When that happens, bankruptcy can be used to restart. Frequently, businesses that have been very successful were started by people who, prior to starting the successful business, had unsuccessful businesses that may have even ended up in bankruptcy. The later success provides jobs, increases the supply of goods and services, and generates tax revenues. In sum, bankruptcy is a form of debt relief that is good for society and good for the debtor who enjoys that relief.
I enjoy practicing bankruptcy law because I know I’m helping people. I’ve received countless “thank you” cards — and even lagniappes such as delicious avocados — from former clients because they were so pleased with the work I did for them. To see a financial burden lifted from the shoulders of my clients through Chapter 11 bankruptcy is a very rewarding experience.
This book is tailored to readers who are facing debts—whether they are business owners, individuals, or married couples—and who may be good candidates for the powerful tool of Chapter 11 bankruptcy. What I hope readers take away from these pages is this: For anyone who has very large debts and is having difficulty servicing those debts, there is hope, and there are solutions.
- Bankruptcy: A Broad Overview
I’ve represented businesses, individuals, and legally married couples in various chapters of bankruptcy. Businesses can file under Chapter 7 or Chapter 11 bankruptcy. Individuals and legally married couple can file under Chapters 7, 11, and 13.
- The Business Chapter 7
When a business files a Chapter 7 bankruptcy, its assets are liquidated, and the business ceases to exist. Therefore, I will never file a business Chapter 7 unless there are assets for a Chapter 7 Trustee to liquidate. In fact, judges in the Central District of California take a dim view of business Chapter 7 bankruptcies if there are no assets to be liquidated, in part because businesses can’t get a Chapter 7 discharge. The Bankruptcy Code makes it clear that only individuals can receive a Chapter 7 discharge.
- The Business Chapter 11
In the Chapter 11 bankruptcy realm, there are two options for businesses. One is the standard Chapter 11 bankruptcy, in which we file a plan, disclosure statement, and many other documents. The goal is to get the plan of reorganization confirmed so that the business can reorganize and manage its debts.
Certain types of debt, such as priority tax debt and secured debt, must be paid in full over the life of the plan. However, for other types of debt, we may be able to either get rid of the debt entirely — which I have done — or reduce the debt considerably.
Funding the plan can be done through some combination of future income, and partial or total liquidation of assets.
A complete liquidation of assets is, in essence, a Chapter 7 bankruptcy in Chapter 11 bankruptcy clothing. Therefore, there has to be a good reason to do a Chapter 11 full liquidation.
For example, if the owners have signed personal guarantees on the business’s debts, their personal liability will not be discharged when the business receives its discharge. If, on the one hand, they put the business into a Chapter 7, the Chapter 7 Trustee might deplete the sale proceeds with administrative expenses, leading to a smaller payout to the creditors. Therefore, after the liquidation the owners could face considerable liability. If, on the other hand, they do the liquidation themselves in a Chapter 11, they may end up with a greater reduction in their post-bankruptcy liability.
Of course, the liquidation could be done outside of bankruptcy, but there may not be enough time to do it outside of bankruptcy. For example, there may be judgment creditors who are about to seize funds or other assets, and the only way to stop them is by filing the bankruptcy case.
Partial liquidations in Chapter 11 are more common, and are done if the business’s projected future income is insufficient by itself to fund the plan.
Ultimately, when we file a Chapter 11, we should already have an exit strategy that includes coming up with a plan that the creditors will accept, and the court will confirm. The plan should provide a roadmap for dealing with the debts via reorganization over time; it might be a few years or even a few decades, depending on whether the debts are secured.
- The Subchapter V Chapter 11 Business Bankruptcy
Chapter 11 has a recently added subchapter called Subchapter V. In spite of what you may have heard it is not Chapter 5. The Bankruptcy Code does have a Chapter 5, but it’s not a chapter under which anyone actually files; instead, it is one of the three foundational chapters (Chapters 1, 3, and 5) that apply to all bankruptcy cases.
There are business cases where it makes sense to do a Subchapter V of Chapter 11 bankruptcy. If the business qualifies as a small business as defined in the Bankruptcy Code, then it can do a Subchapter V, which is a much more streamlined approach to Chapter 11 bankruptcy.
However, while Subchapter V is only available to small businesses, the standard Chapter 11 bankruptcy can be used for both small and large businesses.
- Individual Bankruptcies
An individual or legally married couple will typically first consider a Chapter 7 bankruptcy, which allows for the elimination of (almost) all debts with no payments to creditors. Most individuals choose this option to get rid of all their debts and move on with their lives. Of course, there are some limitations, such as the fact that some debts don’t get discharged.
An individual whose income is too high (in a way that can be made precise) will not qualify for Chapter 7 bankruptcy. If this is the case, Chapter 13 bankruptcy is the next option for the debtor to consider. Chapter 13 bankruptcy is not available to businesses: Only individuals and legally married couples are eligible for Chapter 13 protection. While Chapter 13 bankruptcy has no income limitations, it does have two debt limitations — one for secured debts, the other for unsecured debts. If the debts are too large, then the individual or married couple cannot file a Chapter 13 bankruptcy, and must consider a Chapter 11 bankruptcy instead.
Whether for an individual, legally married couple, or business, the key thing that Chapter 11 bankruptcy buys is time, which is the most precious thing anyone has. It provides time to catch one’s financial breath, so to speak, through a restructuring of debt that paves a path for future success.
- The Business Chapter 7
- A Broad Range of Clients
I have had a very broad range of clients. Some who contact me aren’t ready to file bankruptcy, but just want a better sense of their financial picture and options. They will lay out the facts of their situation, and may have already identified something negative looming in the future, but might not feel that debt reorganization is necessary. Other clients come to me with a pending lawsuit; they know that if they win the lawsuit, they won’t have to worry, but if they lose the lawsuit, they will incur a huge debt.
On the other end of the spectrum, some clients are facing a foreclosure sale in a week, and are desperate for help. Not long ago, I handled a bankruptcy case for a business that had commercial property which was on the chopping block. Had we not filed for bankruptcy, that property would have been gone. Some clients have considerable debt that they are currently able to service, but can see the handwriting on the wall, and would like to file for bankruptcy protection.
- Getting Started: The Initial Conversation
During the initial conversation that I have with a business owner or individual, I determine their goals. For a business, the goal might be to simply shut it down if nothing can be done to save it. Alternatively, a little more time for the revenue stream to increase may be all that’s needed, and bankruptcy could provide that via debt reorganization.
When dealing with a business or individual (whose debts exceed the Chapter 13 limits) who is not eligible for a Subchapter V bankruptcy, and wishes to reorganize, it must pursue a Chapter 11 bankruptcy, which means a plan will need to be developed for which the creditors will vote. Therefore, we’ll discuss possible exit strategies.
I’ll ask about the nature of the debts because the creditors’ claims must be put into various priority classes. The nature of a debt will, to a great degree, determine its treatment under the plan. This involves identifying the debtor’s relationship with each creditor. Are some creditors willing to vote in favor of a particular plan? Are other creditors never going to get on board with any plan? These questions must be answered.
A very important datum is the debtor’s income stream because future income is usually how the plan is funded. Information about assets is also needed because an insufficient income stream can be counterbalanced by the liquidation of assets as part of the bankruptcy.
While many other topics will be covered during the initial conversation, these are some of the most important ones.
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