The ‘breaking point’ for a business owner; advice for a business owner contemplating bankruptcy

Final excerpts from interviewing Reno Fernandez, a bankruptcy attorney from Macdonald & Associates, in San Francisco, CA.

What is the ‘breaking point’ for a company that files bankruptcy? Is there a ‘last straw’ that convinces them to file?

An early warning sign is when cash flow is insufficient to pay invoices on a current basis and you have to start “slow paying” trade creditors.  Next, trade creditors will frequently refuse to provide goods or services except on a cash on delivery or ‘COD’ basis.  A more serious red flag is when a crucial line of credit is frozen, which can effectively force a bankruptcy if the company has immediate cash needs.  Much more serious is the commencement of foreclosure proceedings or the recordation of a notice of default – it is important to pay attention to the timeline following the notice of default and be prepared to file a case before the sale date.  In the real estate context, the appointment of a rents and profits receiver is a common move by creditors.  A Chapter 11 case should be filed quickly to regain control of the property, and an emergency cash collateral motion should be filed to obtain authority to use the rents.  Managers and owners should pay close attention to their financial statements during the prevailing economic crisis and seek advice before any of these events occur, if possible.  The earlier problems are identified, the more options there are, including workouts, pre-negotiated plans, assignments for the benefit of creditors (“ABC’s”) and others.  As time goes by, these options begin to disappear.

What advice do you have for a business owner contemplating bankruptcy?

The best advice is to be proactive in selecting attorneys and advisors.  Your attorney should be familiar with the business world and have experience taking a variety of businesses through successful Chapter 11’s, such as restaurants, developers, lenders, retailers and manufacturers.  At a minimum, your attorney should be a bankruptcy expert, and you should politely avoid letting your family attorney or corporate counsel dabble in bankruptcy and “experiment” on your business – a common observation by outsiders is that “the laws of gravity are suspended in bankruptcy,” and you need someone who is comfortable operating in that environment.  Most attorneys will, or should, talk with you for free, and a call can be instrumental in educating yourself about your options and formulating a strategy. 

Readers, I recommend that you call Reno if you or someone you know is contemplating bankruptcy:

Reno Fernandez

Macdonald & Associates

221 Sansome Street, Third Floor

San Francisco, CA  94104
Tel: (415) 362-0449 Ext. 204

www.mac-associates.com | California Bankruptcy Blog

Common mistakes that business owners make prior to filing (and after filing) bankruptcy that end up hurting them during the bankruptcy

More excerpts from interviewing Reno Fernandez, a bankruptcy attorney from Macdonald & Associates, in San Francisco, CA.

What are common mistakes that business owners make prior to filing bankruptcy that end up hurting them during the bankruptcy?

The most dangerous mistake is waiting too long before getting professional help.  I have heard some heartbreaking stories from clients who took out a second mortgage on their home or used their retirement (which is generally exempt in a personal bankruptcy) to buy time for their business and weather the storm only to find out that they have no hope of recovering their contribution to the business.  In this case, it would be far better to address the causes of the financial distress up front and either conserve or use the owners’ resources to give the business a fresh start from a stronger position.  In addition, lending to a business during the bankruptcy (called Debtor-in-Possession or “DIP” financing) can be done on a priority or secured basis and is far more secure than making capital contributions or loans to the business prior to filing.

What are common mistakes that business owners make after filing bankruptcy that end up hurting them during the bankruptcy?

It is critical to retain professionals, such as attorneys, accountants and consultants, that are both experienced in handling complex Chapter 11 cases and sensitive to costs.  Professionals who do not take this practical approach put the case at risk of administrative insolvency, which means that professional fees climb so high that they outstrip any potential recovery to other creditors.  This can result in the ouster of management and appointment of a Chapter 11 trustee or conversion to a Chapter 7 liquidation.  Larger businesses especially should keep in mind that a committee of unsecured creditors may be appointed to represent the interests of trade creditors, and the committee’s professionals are also paid from the assets of the business.  It is important for debtor’s counsel to be able to account for and inform you about these costs and put in place appropriate controls.

Readers, I recommend that you call Reno if you or someone you know is contemplating bankruptcy:

Reno Fernandez

Macdonald & Associates

221 Sansome Street, Third Floor

San Francisco, CA  94104
Tel: (415) 362-0449 Ext. 204

www.mac-associates.com | California Bankruptcy Blog

Key motivations for a business owner to file bankruptcy

Recently, I had the pleasure of interviewing Reno Fernandez, a bankruptcy attorney from Macdonald & Associates, in San Francisco, CA. I want to share a couple excerpts from the interview with my faithful blog followers.  More to come in later blogs.

What are the key motivations for a business owner to file bankruptcy?

In Chapter 11 (named after the chapter in the bankruptcy code), the overall goal is to restructure debt and return to a good cash flow position.  For example, a Chapter 11 may allow you to take the principal of a secured loan down to the value of the collateral, roll up the arrears and place them on the back end, decrease the interest terms to market rate (many companies are struggling to service loans obtained before the credit crunch at high rates of interest) and discharge trade debt at a fraction of face value (for instance, you might pay off all trade creditors at 10% or 25% of the outstanding invoices).   Another advantage of Chapter 11 is the ability to shut down unprofitable operations while preserving the profit centers; this can be done by rejecting leases and other executory contracts or abandoning overencumbered assets.  Assets can also be sold in bankruptcy, whether through the plan or a quick “Section 363 Sale,” and this can be done even if the assets are subject to a disputed claim.  Chapter 11 can be used to conduct an orderly liquidation as well.  In Chapter 11, you remain in control of the business, as opposed to Chapter 7, in which an independent trustee is appointed to liquidate the business.  Depending on the reason for filing, the needs of the company and the exit strategy, the Bankruptcy Code affords several flexible solutions.

What are the most common complaints from a business owners inquiring about bankruptcy?

The most common problems tend to fall into two categories:  problems with the capital or debt structure and problems with operations.  In the current downturn, many businesses find that productivity and orders are steady but the loans are impossible to maintain.  This is most common in the case of loans obtained prior to the credit crunch that are now maturing at a time that new financing is not available.  Under the right circumstances, these loans can be extended and re-written in bankruptcy to bring their terms in line with the current market in which interest rates are significantly lower.

Readers, I recommend that you call Reno if you or someone you know is contemplating bankruptcy:

Reno Fernandez

Macdonald & Associates

221 Sansome Street, Third Floor

San Francisco, CA  94104
Tel: (415) 362-0449 Ext. 204

www.mac-associates.com | California Bankruptcy Blog