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