Unfortunately, by the time most folks consult with a bankruptcy attorney about their financial issues, the situation is near the point of an emergency. Typically, this is because business owners do everything possible to save their business prior to opening that last door of bankruptcy; in other situations, it’s simply because the lenders start closing in on and trying to collect the loans.
Many of the business owners who consult with me for the first time have already signed a forbearance agreement with their secured lenders, or may have lawsuits pending from their unsecured creditors. In general, they are in serious financial trouble that needs to be immediately corrected to prevent the shutting down of the business or a foreclosure of a home based on a second mortgage they provided.
The lesson here is this: Business owners need to address these things early on, instead of waiting until the secured creditor is knocking at the door with a forbearance agreement or threatening foreclosure, or until the unsecured creditor has filed a lawsuit or obtained a judgment.
Depending on the situation, the lawyer may be able to guide the business through the bankruptcy process, or through negotiations with the creditors (without the need for bankruptcy). For this reason, business owners should talk with their accountant and a lawyer as soon as financial troubles arise. The lawyer who is hired should be able to talk to the accountant about the business, as well as its prospects and problems, and whether bankruptcy should be pursued or the outstanding debts can otherwise be resolved, and the business can continue operating profitably.
Addressing the problems early allows the business owner to assess the feasibility of negotiating a solution that does not include bankruptcy. Rather than having to hire their own counsel to deal with the bankruptcy process, some creditors may be willing to accept a deal. Regardless, recognizing the problem and jumping on it early can set the stage for the best outcome.
Warning Signs: When It’s Time To Take Action
In addition to lawsuits from unsecured creditors, and foreclosure threats or a forbearance agreement from secured lenders, any sort of cash crunch is a sign that the business owner needs to begin speaking with their accountant and looking for a bankruptcy lawyer. What ultimately triggers action on the part of the business owner may be the inability to pay salaries, vendors, landlords, or secured lenders, compounded by outstanding debts, such as large, secured debts that may be under-secured.
Eligibility For The Bankruptcy Process
Any type of small or medium-sized business entity that is currently operating is eligible for bankruptcy of some type; the specific type pursued will depend on the entity’s structure. For instance, an individual with a sole proprietorship would have the option of a Chapter 7 bankruptcy, which is a straight liquidation bankruptcy, while an individual reorganization could be done through a Chapter 13 bankruptcy. For a more complicated small business reorganization, Chapter 11 bankruptcy could be used.
Limitations as to eligibility (i.e., what business entity can qualify as a small business) come into play mostly under Subchapter V of the Small Business Reorganization Act (SBRA). For example, a single-asset real estate business (i.e., a business owner who owns a single property in a single entity and all of the income and revenue driven through that entity is from that single real estate asset) would not qualify for a Subchapter V bankruptcy, but would qualify for a Chapter 7 or Chapter 11 bankruptcy.
In general, all unsecured debt, as well as secured debt that is under-secured by the asset that is providing the security can be discharged. The only debts that cannot be discharged are those that are secured by property (up to the value of the property securing those debts), and those that fall under certain exceptions under the bankruptcy code, such as debts that were obtained through fraud, misrepresentation, or the debtor’s acting as a trustee of some kind (e.g., certain taxes that would be owed for employment).
Common Misconceptions Surrounding Bankruptcy
The biggest misconception about bankruptcy comes down to the stigma surrounding it. Many people have negative ideas associated with bankruptcy, and think of it as “giving up” or reaching “the end of the road.” However, business owners could look at bankruptcy as a “gift” given by Congress and the federal government in an attempt to save certain business owners from having to inject their entire life savings into a business. A bankruptcy ensures that all of a business’ creditors get paid some portion of the debts (instead of just one or two creditors reaping all of the reward from the liquidation of a business) and prevents the job losses and negative economic impacts that result from the closure of small to medium-sized businesses that avoid closure.
Another misconception is that all bankruptcies, regardless of the circumstances, are expensive. While it is true that bankruptcy can be expensive, it is not always the case. For instance, individual bankruptcies are not necessarily expensive, though business bankruptcies can be. Since there are some costs involved with business bankruptcies, business owners need to consider those costs and decide how they want to deal with the costs on the front end.
Part of the calculus that goes into this consideration is whether the business will save enough money through the bankruptcy process to justify the cost. If the answer is “Yes,” then proceeding with bankruptcy is a simple economic decision; it is a lot better to spend money on the bankruptcy process in order to achieve a definite result that will allow the business to survive than to spend money on a losing fight happening outside of the bankruptcy process.
For more information on The Basics Of Bankruptcy Law, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (205) 506-3354 today.