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. 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 Bankruptcyand 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

  • Stock and bond prices up

  • Employment down

  • Energy remains expensive

  • Housing remains flat

  • GDP is limping along

  • Disability is exploding


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 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


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


Avoiding Bankruptcy

  • Strategic

  • Financial

  • Operational


Provide Exceptional Value

  • What business are we in?

  • Who are the customers?

  • What do the customers value?


Competitive Advantage


Strategic Planning

External

Internal

Strength & Weaknesses

Products

Processes (production, marketing, fulfillment)

People

Management

Supplier relations

  • Competitors

  • Technology

  • Customers

  • Economic and political environment


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

  • Sell it now

  • Workout; debt negotiation

  • Do Not Use Retirement Assets hoping for an economic upturn

  • Chapter 11 Restructuring


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 “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.

  • 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

  • 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

  • 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?

  • 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”

  • 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”

  • 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 “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?

  • 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

  • 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

  • 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

  • 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

  • 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

  • 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. 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 200Danbury, CT 06811(203) 286-4121www.balbuslaw.com


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