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What Every Business Owner Needs to Know About Bankruptcy and How to Avoid It. Introduction. Economic overview What businesses can do: Strategic planning Capitalization Financing Operations Debt is the problem; Bankruptcy may be the solution. Economic Overview.

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

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What every business owner needs to know about bankruptcy and how to avoid it

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



  • Economic overview

  • What businesses can do:

    • Strategic planning

    • Capitalization

    • Financing

    • Operations

  • Debt is the problem;

    Bankruptcy may be the solution

Economic overview

Economic Overview

  • Stock and bond prices up

  • Employment down

  • Energy remains expensive

  • Housing remains flat

  • GDP is limping along

  • Disability is exploding

Too much debt

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.

Too much debt1

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.

Debt fueled consumption

Debt-Fueled Consumption

Too much debt2

Too Much Debt

  • Inflation in asset prices – homes, stocks, Treasuries, food and gasoline

  • Unproductive, unmanageable debt cannot be serviced

  • Taxing, borrowing &

    spending is


Avoiding bankruptcy

Avoiding Bankruptcy

  • Strategic

  • Financial

  • Operational

Provide exceptional value

Provide Exceptional Value

  • What business are we in?

  • Who are the customers?

  • What do the customers value?

Competitive advantage

Competitive Advantage

Strategic planning

Strategic Planning



Strength & Weaknesses


Processes (production, marketing, fulfillment)



Supplier relations

  • Competitors

  • Technology

  • Customers

  • Economic and political environment

Additional steps

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

Average business

“Average” Business

  • Sell it now

  • Workout; debt negotiation

  • Do Not Use Retirement Assets hoping for an economic upturn

  • Chapter 11 Restructuring

Chapter 11 reorganizations

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

Chapter 11 reorganizations1

Chapter 11 “Reorganizations”

  • Exit Strategy

    • Profitable restructuring plan

    • Obtain votes

    • Cash collateral

  • Fiduciary Duty

  • Reporting Obligations

  • Timing

  • Cost

  • Personal Guarantees

Debt is the problem bankruptcy is the solution

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.

Benefits of bankruptcy

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

What bankruptcy cannot do

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)

What will happen to my credit

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

Chapter 7 liquidation

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)

Chapter 13 debt consolidation

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

Chapter 11 reorganizations2

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

When to file

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

Pre filing planning timing

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

Bankruptcy process

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

How to pay for bankruptcy

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

Balbus law firm

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

Andrew g balbus

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

Andrew g balbus1

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

108 mill plain road suite 200 danbury ct 06811 203 286 4121 www balbuslaw com

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

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