For an operating business, the bankruptcy process can be time-consuming, invasive, difficult to maneuver, and expensive. You need someone who can explain all of the options, and prepare you for what’s to come.
Rule #1: Don’t wait until the last minute. There are lots of things most operating companies need to do when they file for bankruptcy. Attorneys need time to evaluate what needs to be done, gather evidence, prepare motions, and hit the ground running. Waiting until the business is almost out of cash, or until some negative event is about to happen, hurts your ability to hire good counsel and successfully prosecute a Chapter 11 case.
When is filing for bankruptcy a good idea?
For a company, Chapter 7 (liquidation by a trustee) usually is worth doing only if the business already is closed, and if (a) there are assets that can be sold, or (b) a strong signal needs to be conveyed that the business really is defunct. For operating businesses that have some going concern value, an orderly liquidation through Chapter 11 is a better option.
For operating companies that want to reorganize, Chapter 11 is a good idea if the business is (or can be) profitable, but needs to shed some bad leases, restructure secured loans, and/or stretch out payments to creditors. Chapter 11 can also be good for real estate companies with property that has significant equity or can generate enough cash to make monthly interest payments. Bankruptcy protects the debtor’s assets and gives it some time to negotiate terms with creditors.
Generally, what is the first thing a company should do if it plans to file for bankruptcy?
Especially if the company is operating, get its records (and record-keeping) in order. From the first day to the last, the debtor’s success depends on its ability to properly identify and disclose its assets, liabilities and financial history, generate reliable financial statements during the case, and prepare realistic financial projections. No matter how profitable a company may be, cases can go south quickly if the debtor’s financial reporting is inadequate or untrustworthy.
What should a small business expect during the first few months after filing for bankruptcy?
Petitions often are filed on the eve of a foreclosure, judgment, or other adverse event the debtor wants to delay. But there is no rest for the weary.
Existing bank accounts must be closed and new ones opened right away. A “7-day package” must be submitted within a week. Detailed schedules of assets and liabilities must be filed within 15 days. Soon after the case is filed, someone will need to attend an “initial debtor interview” and later a “meeting of creditors.” Detailed operating reports must be filed each month. In a Subchapter V “small business” case, the debtor must file financial statements and tax return with its petition, and generally must file a plan within 90 days.
While doing all of this (and more), the debtor must keep its business going. For a truly small businesses, this is a monumental task.
What are some bankruptcy pitfalls that businesses should avoid?
It’s a long list. Mostly, don’t do things that may turn the judge against you. Don’t transfer away assets before filing. Don’t provide false or misleading information in court filings. Choose your battles (if you litigate about everything, the judge may see you as the problem, not the solution).
Also, don’t make everyone your enemy. Litigating against creditors – especially secured creditors who can add their legal fees to the loan balance – drives up costs. Often, by the time you finish fighting with a hostile creditor you will have spent more on legal fees than you would have spent if you had just agreed to pay the creditor more under a chapter 11 plan.