Will Geer, a partner with Rountree Leitman Klein & Geer, LLC discusses the questions a business should ask itself when determining whether to file for Chapter 11 bankruptcy.
As a business owner, I can tell you that operating your own ship is one of the most exciting and frightening things you’ll ever do, but the rewards are immeasurable (well, almost immeasurable). Almost every business will experience some lull in income a month or two out of the year; however, sometimes that stagnation turns into a regular monthly occurrence that results in creditors knocking down your door demanding to be paid. It feels as if you are Atlas carrying the planet’s troubles on your shoulders, even if it is limited to your own world. In this situation, an appropriate solution may be to file Chapter 11 bankruptcy for your business to restructure the debts of the business to give you and your company a bit of breathing room. Before considering Chapter 11 as a viable option, you will want to ask yourself these 5 questions:
1. Is the management ready and willing to cooperate?
Filing bankruptcy should not be taken lightly and adhering to the requirements of the code, including the quarterly Trustee payments, monthly operating reports, advanced disclosure requirements, and numerous hearings will take a significant amount of time and energy from your already hectic schedule. If management is not ready and willing to take on these new responsibilities, shutting the doors or filing Chapter 7 to allow for an orderly liquidation may be the route to take. Chapter 11 is also an expensive undertaking, so make sure there is actually something to reorganize before paying thousands of dollars in attorneys’ fees.
2. Is your product or service marketable?
In Chapter 11, cash flow is everything, and something filing Chapter 11 cannot do is increase the marketability of your business. It can, however, help increase your immediate cash flow concerns by preventing creditor collection efforts and lowering secured creditor payments. Certain tax obligations may also be treated in the Chapter 11 Plan of Reorganization. But one thing a Chapter 11 filing will not do is create a marketable product or service where one does not exist, so if the market is entirely tapped or your product is simply not expected to sell in the future, it may be times to shut the doors. If you do wind up filing, the lack of cash flow will draw objections on the feasibility of your Chapter 11 Plan. In short, if you cannot make enough money to fund a viable plan of reorganization, your case will be unsuccessful and likely dismissed.
3. Does my lender have an interest in “cash collateral”?
What is “cash collateral”, you may ask. In short, cash collateral is, among other things, cash, negotiable instruments, rents, inventory, and accounts receivables of a business in which a lender claims a security interest. For instance, in Georgia, when a lender loans a borrower money to fund the purchase of real property, the lender will take a security interest in the real property as evidenced by a Deed to Secure Debt. This security instrument will often contain a clause providing that all rents and income arising from the use of the real property will secure the debt obligation of the borrower. Just because your lender has an interest in cash collateral does not mean that filing Chapter 11 is impossible. In fact, one of the first motions that a Debtor’s attorney will file in this situation is a Motion to Use Cash Collateral to allow a business to continue to operate throughout the bankruptcy. However, be aware that attorneys’ fees, including the initial retainer, will often have to be paid from funds not categorized as cash collateral. Otherwise, the creditor and debtor must work out some type of “carve-out” to pay your attorney. Often, the executive officers of the corporate debtor will fund the debtor’s attorneys’ fees for this reason.
4. Does my business only have one creditor?
This situation often presents itself in the case of a single piece of real property in which all the Debtor’s income is derived from the operation of that property. In this case, there may be only one secured creditor. If you have a company with only one creditor, filing Chapter 11 bankruptcy is probably not the best option. Doing so will only prevent foreclosure for a few months at best, as the secured creditor will file a Motion to Dismiss for “bad-faith” filing based on your inability to effectuate a viable plan. In Chapter 11, creditors are given the option to vote on the acceptance of your plan. Under certain circumstances, you may force the creditors to accept the terms of the plan; however, one of the conditions of forcing such acceptance is to have the affirmative vote of at least one impaired class of creditors. If you only have one secured creditor in one class, you will not be able to satisfy this requirement. “But wait”, you cry, “I have a few unsecured creditors that can vote to accept the plan!” This may be your saving grace; however, in most of these cases, the secured creditor’s lien is worth more than the value of the property. As a result, the secured creditor’s claim will be bifurcated into a secured claim and unsecured claim. The unsecured deficiency claim will be lumped into the general unsecured claims class with the aforementioned unsecured creditors, and because this deficiency claim will typically be MUCH larger than the aggregate of the other claims, it will control that class and result in a vote against your Plan.
5. Do we have a Plan?
I’m not necessarily talking about a finalized plan of reorganization, but you should definitely have an idea, with the help of experience counsel, of your end-game goal. Chapter 11 requires hours and hours of planning and communication prior to filing the petition, and prior to that petition being filed, the debtor and its attorney should have some idea of the results to be obtained whether it be to restructure short-term trade debt into a long-term liability or to force secured creditors to accept more favorable terms and consequently lower your secured payments. Going into the case without adequate preparation is simply a waste of time and money for both you and your company’s attorney.
You’ve filed a bankruptcy in Georgia, and now you want to settle down and purchase a house. Contrary to popular belief, filing bankruptcy is not going to destroy your credit for life. While it is true that filing for bankruptcy will ding your credit to the tune of about 150 points, you will begin to receive credit card offers from lenders soon after you receive your discharge. Why, you ask? Because if you receive a discharge under Chapter 7, you cannot receive another discharge to wipe out your debts for another 8 years. Taking a credit card offer is not always the best option for someone who just got out of debt, so only apply for a credit card if you have the discipline to pay off the balance in full every month. Here are a few things you can do to reestablish your credit to qualify for a mortgage at a decent rate:
1. Pay Your Bills on Time
This is the most important step you can take in rebuilding your credit after bankruptcy. Rent, utilities, and any payments you may continue to have throughout your bankruptcy, such as your home mortgage and car note, should always be paid on time. I recommend setting up automatic payment deductions for all expenses so you don’t even have to think about it. Payment history is one of the most important factors in determining your FICO score, so never make a late payment.
2. Take a Credit Card Offer, ON ONE CONDITION!
Everyone falls on hard times, and after bankruptcy, you will have credit card offers coming in the mail. If you absolutely know that you will pay off the balance in full every single month, then apply and use this to your advantage. This is a quick way to rebuild your credit after filing a Georgia bankruptcy. I recommend charging only one item per month on this card in the beginning, such as your cable bill or your car’s gas usage. If you pay it off in full every month, charge a little more.
3. Cash is King
If you want to purchase a house, cash will always be king, and saving up for a 20% down payment will make it much easier to qualify for a mortgage with an interest rate you can afford.
4. Verify Your Credit Report
Four months after your bankruptcy case closes, check your credit report to ensure that any pre-bankruptcy charges are still includes and talk with your attorney about disputing them.
5. Get a Second Card
If you prove to yourself that you can pay off the entire balance on the first card at the end of each month, apply for a second credit card and do the same.
A Chapter 7 case is a “liquidation” proceeding in which the Chapter 7 trustee is tasked with the administration of your case. The trustee’s job is to maximize the amount of property in the bankruptcy estate for the benefit of unsecured creditors. The bankruptcy estate is defined as all legal and equitable interest the debtor has as of the date of filing. The estate is subject to the control of the trustee, and the trustee has the ability to reach back and void certain transfers that were made prior to a debtor filing bankruptcy. A common scenario is when a debtor transfers title to a residence to his or her spouse or child shortly before filing. Some debtors will attempt to be clever and transfer a residence to a family trust a few months before filing. None of these techniques will work to exclude your residence from the grasp of the Trustee. Under Section 547 of the bankruptcy code, the Trustee may avoid any transfer of property to an insider (family member or business partner) made within one year of filing.
Think you can just wait a year and be safe? Think again. Under Section 548 of the bankruptcy code, the Trustee may reach back two years if he can prove that the transfer was made with the intent to hinder and defraud creditors. The aforementioned code sections are called Preference sections, and they were enacted to prevent the “preference” of the debtor to pay one creditor over the other. The entire bankruptcy system is designed to give the Debtor a fresh start and an equitable distribution to each unsecured creditor.
It’s important to understand that, once you file for bankruptcy, an automatic stay is put into place that prevents creditors from taking action against you or seizing your property during the proceedings. Regardless of whether you file for Chapter 11, Chapter 12, or Chapter 7, an automatic stay can provide crucial protection as you seek relief from unmanageable debt.
Specifically, the automatic stay in bankruptcy can help by stopping:
There are, however, certain circumstances in which an automatic stay may not help. For example, while the stay will prevent the IRS from seizing your property or issuing a tax lien, you may still be audited by the IRS or sent a deficiency notice. In addition, bankruptcy does not stop required child support. alimony payments or criminal proceedings.
In some cases, a creditor may be able to request that the automatic stay be lifted. In order to do so, the creditor must submit a motion to the court explaining why the stay should no longer be in place. If the court grants the motion, the creditor can move forward with their collection efforts.
If you filed for bankruptcy and your case has been dismissed within the last year, the automatic stay will only remain in place for 30 days, absent obtaining Court approval for an extension. Additionally, an automatic stay is not permitted if you’ve filed for bankruptcy three times in a year.
The knowledgeable bankruptcy attorneys at Rountree Leitman & Klein LLC assist clients throughout Georgia who are seeking relief from creditors and debt through bankruptcy. Call 404-737-9623 or contact us online to schedule a free consultation in our Atlanta office.
Rountree Leitman Klein & Geer, LLC's blog is a resource provided to clients, prospective clients, and colleagues that discusses issues related to Personal Bankruptcy, Business Bankruptcy, Collections, and Litigation.