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

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