Law Offices of Nicholas Gebelt

Will I Be Able To Operate Business As Usual During A Small Business Bankruptcy?


What do we mean by business as usual? Some things that the company is doing may need to get court approval. Let me give you a straightforward example.

Suppose one of the business’s assets is a rental property. The business is renting out this property to an entity, and the business also has a mortgage on the property. The mortgage undoubtedly has a section called assignment of rents. When the business took out the mortgage on the rental property, it agreed that the lender had a claim against the tenant’s rent payments.

Outside of bankruptcy, if the business is making its mortgage payments just like clockwork, there will be no issue with the lender. But suppose the business isn’t making the mortgage payments. Then the lender has a claim against the rent that’s coming in. That rent then is a type of asset called cash collateral. When the business files for bankruptcy protection, the business can’t use that cash collateral because the lender has a claim against it. The business can use the cash collateral if either the lender agrees to allow the debtor to use it, or the debtor gets the judge’s permission. Therefore, we must get the judge’s permission by prosecuting a cash collateral motion.

The cash collateral motion is one of the so-called first-day motions we must file very early in the case. Otherwise, the business might not be able to continue its operations.

Despite the name, first-day motions don’t necessarily have to be filed and heard on the first day of the case. First-day motion is simply a term of art.

There are other first-day motions. For example, the business may need to file motions for authority to pay the employees, or to pay critical vendors.

Even if the business operates as it did prepetition, it must close all of its bank accounts and open new ones called debtor in possession (“DIP”) accounts. There may be a DIP account to pay taxes, another to pay employees, and another for general operations.

Everything the business does under very close oversight by the bankruptcy judge assigned to the case and office of the United States trustee. In essence, with the Court’s permission, you’ll be able to run your business as usual; but you must get the Court’s permission.

Will I Lose My Business If I Have To File A Small Business Bankruptcy?

First, the question didn’t specified the chapter.

If the small business is going out of business and the company goes into Chapter 7, the answer is yes, the business is gone. The Chapter 7 Trustee appointed to the case will liquidate the business and use the proceeds to pay creditors, and the company will cease to exist.

If, on the one hand, the business files a standard Chapter 11 because it wants to stay in business, then if it gets the plan confirmed without unanimity, then under the absolute priority rule you’ll lose your ownership interest in the business. The only way to get back any of that interest is by buying it back from the bankruptcy estate.

If, on the other hand, the business files under the Small Business Reorganization Act, the so-called Subchapter V, then there is no absolute priority rule, so yes, you do get to keep your business.

Will My Business Ever Be Able To Get Financing To Support What We Do Again If I File A Business Bankruptcy?

The short answer is yes. The critical factor is what the terms of that financing will be. While you’re in the bankruptcy case, you will have to get permission from the court to incur new debt. Section 364 of the Bankruptcy Code discusses post-petition debt incurrence. It contains a stair-step structure. You start out trying to get unsecured debt; if you can’t get that, you try to get secured debt. The terms can be tricky because a lender views the risk as high, and may ask for a high interest rate. The more skin the business has in the game, the more likely the creditor will be to lend. If, on the other hand, the business can show the prospective lender it has sources of revenue, and things are back on track, then the lender may be quite willing to lend money to the business.

It is very fact specific. There are certainly businesses that go through a Chapter 11 bankruptcy, and can get financing without much difficulty. However, keep in mind that the terms will reflect the perceived risk: the greater the risk, the more demanding the terms. Typically, the business will face a higher than normal interest rate. Maybe the creditor wants to have some security interest in real property or other assets that the business has so that the creditor is protected.

To make absolute statements on these questions is tough because there are all sorts of twists and turns. Give me a call; we can talk, (562) 777-9159.

For more information on Business Bankruptcy Law In California, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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