What Every Business Owner Needs to Know About Bankruptcy and How to Avoid It

1. What Every Business Owner Needs to Know About Bankruptcyand How to Avoid It

2. Introduction • Economic overview • What businesses can do: • Strategic planning • Capitalization • Financing • Operations • Debt is the problem; Bankruptcy may be the solution

3. Economic Overview • Stock and bond prices up • Employment down • Energy remains expensive • Housing remains flat • GDP is limping along • Disability is exploding

4. Too Much Debt • Federal Debt = $17 Trillion or over $50,000/person in US • Excludes unfunded future liabilities of approx. $100 Trillion and costs of Obamacare.

5. Too Much Debt • In 1929, Total Debt (Fed, corp, indiv) as a percentage of National Income (GDP) was 300%. • The Great Depression followed. • In 2013, Total Debt (Fed, corp, indiv) as a percentage of National Income (GDP) is approximately 375%. • The largest debt bubble in the history of mankind.

6. Debt-Fueled Consumption

7. Too Much Debt • Inflation in asset prices – homes, stocks, Treasuries, food and gasoline • Unproductive, unmanageable debt cannot be serviced • Taxing, borrowing & spending is counter-productive

8. Avoiding Bankruptcy • Strategic • Financial • Operational

9. Provide Exceptional Value • What business are we in? • Who are the customers? • What do the customers value?

10. Competitive Advantage

11. Strategic Planning External Internal Strength & Weaknesses Products Processes (production, marketing, fulfillment) People Management Supplier relations • Competitors • Technology • Customers • Economic and political environment

12. Additional Steps • Capitalization • Replace debt with equity • Working capital financing • Increase and extend credit lines • Focus on core business • Cut costs • Don’t cut quality

13. “Average” Business • Sell it now • Workout; debt negotiation • Do Not Use Retirement Assets hoping for an economic upturn • Chapter 11 Restructuring

14. Chapter 11 “Reorganizations” • Used by GM, Chrysler, Blockbuster, Hostess • Can be used by small businesses • Modify loans • Reduce loan to FMV collateral • Reject contracts and leases • Sell assets • Pay unsecured creditors a small % • May need new equity

15. Chapter 11 “Reorganizations” • Exit Strategy • Profitable restructuring plan • Obtain votes • Cash collateral • Fiduciary Duty • Reporting Obligations • Timing • Cost • Personal Guarantees

16. Debt is the Problem. Bankruptcy is the Solution. • Most people file due to job loss, divorce, illness or business decline. • Everyone wants to pay their bills, but they need to take care of their families. • People avoid bankruptcy out of ignorance, fear and the stigma of failure.

17. Benefits of Bankruptcy • Stop harassing phone calls and letters • Stop foreclosure • Stop repossession (possibly get property back) • Stop wage garnishment • Stop lawsuits • Eliminate debts • Reduce payments on debts • Reject or restructure bad contracts

18. What Bankruptcy Cannot Do • Eliminate the rights of secured creditors • Homes, cars • May be able to reduce or restructure the debt • Discharge certain debts • Student loans, domestic support obligations, criminal fines and most taxes • Credit card usage immediately before filing • Protect co-signers (with exceptions)

19. What Will Happen To My Credit? • Most credit scores go up. • If you missed a mortgage payment or minimum credit card payment, your credit score is already low • Old unsecured debt is eliminated • No new bankruptcy for some time • 8 year limit on Chapter 7 to Chapter 7 filings • Rebuilding Credit • 3 years until new mortgage loans

20. Chapter 7 “Liquidation” • Give up non-exempt assets in return for being relieved of debt • Most Debtors keep house and car • Debtors keep their future income • To qualify – be below “median” income • In CT, relatively high “median”: Individual $57k Household of 4 $102k • To qualify – pass “Means Test” • Least costly - $2,300 to $5,000 (+$306) • Available to small businesses (cheap reorg)

21. Chapter 13 “Debt Consolidation” • Pay creditors over 3 to 5 years out of future “disposable income” • Above median debtors with regular income • Debt limits: approx. $1/3 million unsecured; $1million secured • Good for catching up on mortgage arrears or paying back taxes • Why keep house with negative equity? • “Strip off” wholly unsecured second mortgage • $250k FMV house s/t $275k 1st & $35K HELOC • Only individuals, not businesses

22. Chapter 11 “Reorganizations” • Available to individuals • Involves creditors, so more time consuming and more expensive than 7 or 13 • Use real expenses instead of “standard” deductions, so smaller payments to creditors • Negotiated with voting creditors • Can modify loans • “Cram down” loan to FMV collateral

23. When to File? • If you can’t make minimum payments on credit card debt • If you are making just the minimum payments and don’t see how your income will increase to allow you to pay more • If you are using retirement funds, which are exempt from creditors in bankruptcy, to pay creditors • Business – lose access to working capital

24. Pre-Filing Planning/Timing • Exemption Planning – keep exempt assets • Avoid using exempt assets to pay creditors • Convert non-exempt into exempt assets • Timing • Avoid fraudulent transfers and “preferences” • 6 month look-back period for Means Test • Tax issues • Plan for restructuring business • Waiting too long is usually disadvantageous

25. Bankruptcy Process • Initial Consultation • Determine the most advantageous chapter (7,11 or 13) • Negotiate with creditors or not? • What’s the exit strategy? • Assemble financial information • How much will creditors get? For how long? • File petition • Meeting of creditors • Adversary proceedings • Confirm a plan (11 and 13) • Obtain discharge

26. How To Pay For Bankruptcy • Stop paying creditors • Tax refunds • Relatives (debt to relatives is discharged) • Retirement funds • Sell assets that might not be exempt • Payment plans • Bankruptcy must be paid before filing

27. Balbus Law Firm • Able to file in all chapters: 7,11 & 13 • Flexibility to file in the best chapter for the debtor • Represents primarily debtors • Represents individuals and small businesses • Practice devoted to bankruptcy • Practice in CT and NY

28. Andrew G. Balbus • Academic Credentials • LL.M. Bankruptcy St. Johns Law School • JD Harvard Law School • MBA (finance) Columbia University • AB (accounting/management science) Duke University • Phi Beta Kappa • Beta Gamma Sigma

29. Andrew G. Balbus • Unique Background • Prior NYC legal experience in tax & corporate law • Prior investment banking experience financing companies and negotiating debt agreements • Prior turnaround experience restructuring jewelry manufacturing firm on the verge of bankruptcy

30. 108 Mill Plain Road, Suite 200Danbury, CT 06811(203) 286-4121www.balbuslaw.com