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

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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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Presentation Transcript
  • 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.

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?
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