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Bankruptcy is a term we hear all the time but don’t necessarily understand. We’ve put together a brief overview of business bankruptcy in the US to help you understand the meaning and consequences of corporate bankruptcy in today’s down market.

With today’s tough economic situation, we’ve been hearing more and more about business bankruptcies in the news. But what exactly is bankruptcy and what does it mean when a business says it’s filing for bankruptcy.

Bankruptcy is a legal filing that enables struggling businesses to resolve issues of insolvency. Generally caused by a lack of cash flow, filing a bankruptcy can be initiated by the business or by its creditors (called an involuntary bankruptcy). Once a bankruptcy case has been filed, the judicial system works to create a fair settlement between the business debtor and its creditors.

Most business bankruptcies fall into one of four categories, or types of filing:

• Chapter 7: Bankruptcy Liquidation—This type of bankruptcy dissolves the company, selling off its assets to pay all or part of its debts. Chapter 7 bankruptcy protection is generally utilized by companies with irresolvable cash flow or financial problems and by small, sole proprietorship businesses.
• Chapter 11: Bankruptcy Reorganization—This type of bankruptcy takes the corporation through a period of structural and financial reorganization with the goal of regaining profitability. Operations are typically streamlined to reduce costs, some assets can be sold off to satisfy creditors, and other changes are all options with this type of corporate bankruptcy. Chapter 11 bankruptcy filings are generally used by large and medium-sized corporations.
• Chapter 12 Bankruptcy: Bankruptcy for Family Farmers and Fishers—this specialized form of business bankruptcy is designed for family farming and fishing operations, and is used with less frequency than Chapter 7 and Chapter 11 bankruptcy.
• Chapter 13: Wage-Earner Bankruptcy—Frequently used in personal bankruptcy filings, this type of bankruptcy can also be used by sol proprietorship companies. Enabling them to repay debts over a set time period (usually three to five years), Chapter 13 bankruptcy allows the business owner to retain their assets.

If you’re considering filing for corporate bankruptcy, give us a call before making any final decisions. We can provide you with expert advice regarding the future of your company.

Corporate Bankruptcy Filing: What are the next steps?

The word “bankruptcy” gets tossed around a lot… But what does it actually mean and what happens after your company files a bankruptcy. In layman’s terms, bankruptcy is when your company has financial obligations and liabilities that exceed your assets, making you unable to pay your bills as they come due. Filing for bankruptcy is a judicial solution for the debtor—your company—to seek relief from your creditors. The courts will determine if you are unable to satisfy your debts and, if so, attempt to determine a fair way to satisfy your creditors.

Filing for bankruptcy is similar to any other lawsuit: a bankruptcy petition simply starts the process, without guaranteeing any outcome or resolution. However, unlike other legal proceedings, a bankruptcy filing immediately generates an automatic stay, also known as bankruptcy protection. This injunction stops creditors from taking additional action to attempt to collect on their debts until the bankruptcy case is resolved. This stay essentially gives your business temporary relief and time to develop a plan for debt resolution.

As your bankruptcy case proceeds, different creditors will be treated differently, but if or when the court declares your company bankrupt, the court will attempt to satisfy your financial obligations in an equitable and appropriate way.

Of course, just as every company is unique, every bankruptcy filing is different. Depending on the financial obligations, assets, and even structure of your business, your bankruptcy proceeding will unfold differently. Perhaps the most important question is whether to file a Chapter 7 bankruptcy or proceed with a Chapter 11 bankruptcy filing. Chapter 7  dissolves your business, liquefying assets to satisfy creditors. Chapter 11 involves reorganizing the business to regain solvency and profitability.

If you’re considering filing a business bankruptcy, now is the time to consult a professional bankruptcy lawyer like David Ganje. We can help determine the right course of action for your particular company, helping your business achieve the best outcome given the circumstances. There may be non-bankruptcy options available for resolving your business debts so call today!

Corporate Bankruptcy: When Should a Business File for Bankruptcy?

When your company is facing money problems, it can be hard to know when to file for bankruptcy. Consulting with an experienced bankruptcy lawyer can help you determine if your business must file for Chapter 11 or Chapter 7 bankruptcy.

In the current economic climate, more and more businesses are suffering from increased financial stress. When your debts are piling up, it can be hard to decide if or when to file for bankruptcy protection. Here is a brief overview of the issues surrounding bankruptcy, but you should always consult with a professional bankruptcy attorney prior to making any decisions regarding a bankruptcy filing.

The simple answer is, try every other solution before filing for bankruptcy. Even if your company is overwhelmed by debts and creditors, there may be non-judicial resolutions available. Financial restructuring and workouts can help you satisfy your debtors without having to file for bankruptcy. In fact, simply letting your creditors know you’re considering bankruptcy may be incentive enough for them to come to the bargaining table! These types of bankruptcy prevention strategies create a compromise solution between your company your business debtors. The end result is a negotiated partial repayment whereas a bankruptcy would likely result in the creditor getting nothing. Workouts and debt restructuring are a way of resolving your debts without the hassle, cost, or embarrassment of filing bankruptcy.

For small business owners, a business bankruptcy can also impact your personal finances. In partnerships and sole proprietorships, you can be held personally liable for your company’s debts, and your assets can be used to satisfy your creditors. Obviously, in these cases, you’ll want to seek every possible alternative to bankruptcy in order to safeguard your personal property. Additionally, filing for bankruptcy will likely make it harder to start a new business in the future. Not only will you have depleted assets, but the social and financial stigma of bankruptcy may also be a problem for you.

However, if your debt problems can’t be resolved any other way, bankruptcy protection may be your only option. Depending on your company’s structure, there are a number of different options available for corporate bankruptcy. In order to determine the most appropriate type of bankruptcy for your business, you’ll need to consult an experienced bankruptcy attorney. In fact, if your debts are mounting, you may want to speak with a bankruptcy lawyer before the situation becomes truly dire. He or she may be able to help get your company turned around from the brink of disaster with knowledgeable advice and guidance.

If you’re considering business bankruptcy, take control of your circumstances by contacting a bankruptcy professional today!

Because involuntary cases are just a small percentage of bankruptcy cases as a whole, parties do not always realize that the administration of such cases differs in significant respects from the more familiar voluntary cases. The purpose of this article is to provide some pointers to those who occasionally practice in this area. This two-part series presents my top twenty tips for petitioners, judges, alleged debtors, assignees, secured creditors and trustees.

Tips for Judges

11. Wait Until The Return Date Before Setting A Status Or Ordering Relief

In an involuntary case the petitioning creditor must summon the debtor to answer the petition. More often than not, the summons is served by mail. Pursuant to Fed.R.Bank.P. 1011(b) & 9006(f) the debtor has 23 days to answer or otherwise plead after service by mail. Therefore, you should not set a status on the case or enter an order for relief at least until that amount of time has elapsed; otherwise, you will just be wasting the parties’ time and your own.

In that regard it is useful to check the docket or court file to see if a proof of service has been filed. Oftentimes, service is not effected on the day the case is filed, so the time limitations discussed above may need to be further extended. In the absence of prompt proof of service by the petitioner, you should consider entering a show cause order why the case should not be dismissed for failure to prosecute it.

12. Make Sure The Summons Is Fresh

Fed.R.Bank.P. 1010 provides for service of involuntary petitions and allows for the petition and summons to be served by mail. The rule incorporates Fed.R.Bank.P. 7004(e), which mandates that the summons be deposited in the mail within 10 days of issuance. Because debtors in involuntary cases have been known to be elusive, it is not uncommon for the petitioner to encounter difficulty in effecting service. If the summons is mailed more than 10 days after issuance, it is stale and you should not enter an order for relief because in personam jurisdiction has not been obtained.

13. Do Not Authorize The Appointment Of A Gap Trustee Without A Bond

As noted in Tip #2 the petitioner may request the appointment of a trustee before the order for relief. In a chapter 7 case Fed.R.Bank.P. 2001(b) requires the court to condition the appointment on the petitioner’s posting a bond to ensure payment of any judgment that may be entered against the petitioner pursuant to § 303(i). For example, the bond would cover debtor’s damages should the court find that the petition was filed in bad faith. Note that the interim trustee’s bond which protects creditors in case of defalcation of estate funds is entirely different and cannot serve for complying with Fed.R.Bank.P. 2001(b). Also note that the bond requirement applies only in chapter 7, not in chapter 11 cases.

14. State Reasons For Appointing A Gap Trustee And The Trustee’s Duties

Typically, reasons for orders are stated in opinions, not in the orders themselves. An exception applicable to involuntary chapter 7 cases is provided by Fed.R.Bank.P. 2001(c), which provides that the “order directing the appointment of an interim trustee shall state the reason the appointment is necessary and shall specify the trustee’s duties.”

Because of the exceptional nature of this kind of order, the requirement is easily overlooked, but, of course, it should not be. Again, note that this requirement does not apply where the court authorizes the appointment of a chapter 11 trustee before the order for relief. Also note that whereas in chapter 7 cases the rule requires an explicit statement of the § 704 duties imposed on the “gap” trustee, the duties of a chapter 11 trustee authorized before the order for relief are as provided in § 1106.

Tips for Alleged Debtors

15. You Can’t Act Like A DIP If You Aren’t One

As the alleged debtor you are ordinarily free to act as if the involuntary bankruptcy petition had not been filed. See § 303(f). Of course, sometimes you might wish to have the bankruptcy court enter an order approving conduct you are considering, such as a sale of property or the retention of counsel. You should not make this request, nor should the court approve it if you do, because as the alleged debtor you wholly lack the power and authority to act like a trustee in bankruptcy or debtor in possession. Without any statutory basis for such a request, such a request must be denied.

16. You Should Consider Converting An Involuntary 7 To Chapter 11

An order for relief under chapter 7 is a business debtor’s financial death knell. Unless your business is dead, you should consider converting a chapter 7 involuntary to chapter 11. Doing so will leave you in control of the business, at least for the time being, and, even if the business is not viable in the long term, you can influence, if not control, the manner of its eventual liquidation.

You need not consent to the entry of an order for relief under chapter 7 at all. Section 349(a) provides that simply by converting the involuntary chapter 7 petition to chapter 11 the order for relief under chapter 11 is effected. Section 349(e) provides you an additional bonus: conversion to chapter 11 terminates the service of any trustee and restores you to possession. One negative consequence of conversion is the Clerk’s conversion fee and the U.S. Trustee quarterly fees that will apply until your case is closed. Another is that you cannot retain any professional that you owe money as of or before the order for relief, because that professional will not satisfy the disinterestedness test of § 327.

A Tip for Assignees

17. Know Your Rights And Duties Under § 543

As assignee for the benefit of creditors you liquidate a debtor’s assets outside of bankruptcy and distribute the proceeds in accordance with the priorities of state and federal non-bankruptcy law. If you received the assignment within 120 days of the involuntary petition, the entry of the order for relief is automatic under § 303(h)(2). Furthermore, once you know the bankruptcy has been filed, you may not do anything to complete the assignment, even if the order for relief has yet to be entered, and may take only such action as is necessary to preserve the property under your control. See § 543(a).

Section 543 imposes other duties upon you, such as turning over the property to the trustee and filing an accounting of your administration, but these duties may be excused in whole or in part if the interests of creditors and, if the debtor is not insolvent, equity security holders, favor your continuing administration of the property. Therefore, you should strongly consider requesting such relief from the court, especially where you have completed a significant percentage of the assignment.

Note that if you are not excused from the turnover requirements of § 543, Fed.R.Bank.P. 6002 requires you to provide the court and U.S. Trustee a prompt accounting of your administration. You should request the court to approve your fees at the same time as you do the final account of your administration.

A Tip for Secured Creditors

18. You Are In The Catbird Seat, So Take Advantage Of It

Even though the filing of the involuntary case triggers the automatic stay of § 362, you are still in the catbird seat. You can move to lift the stay before the order for relief and the appointment of a trustee. Under Fed.R.Bank.P. 4001(a)(1) you need only serve the debtor and debtor’s attorney, if there is one, and the U.S.Trustee, if so requested or ordered by the court pursuant to Fed.R.Bank.P. 2002(k). Technically, under Fed.R.Bank.P. 4001 you do not have to serve the petitioning creditors or their counsel, but it is unlikely any court would grant relief in the absence of such service.

Whether the involuntary case is a chapter 7 or 11, quick action on your part is likely to result in a situation where you can prevail on a default basis, since the debtor may not be prepared or willing to respond and no trustee may have been appointed. While the court may be reluctant to grant relief in this circumstance, you should strongly consider not waiving your right to a hearing in 30 days as provided by § 362(e). See also Tip #3 which you may be able to use to your advantage.

Tips For Trustees

19. Enforce Compliance By A Contempt Motion If Necessary

Once the order for relief is entered, Fed.R.Bank.P. 1007 requires the debtor to file the list of creditors, schedules and statement of affairs within 15 days. It is not uncommon for the debtor to either disregard this rule or unreasonably delay in complying with it, effectively frustrating the administration of the case.

As the trustee, you are the representative of the estate and should take steps to enforce compliance. If no order has been entered designating a specific individual as the one responsible for filing the papers on behalf of the debtor, you can request the court to make that designation under Fed.R.Bank.P 9001(5). Once the order is entered, you can enforce it through a contempt motion under Fed.R.Bank.P. 9020.

If the debtor or the debtor’s designee has skipped the jurisdiction or it is otherwise impractical to follow the strategy suggested above, you can request the court to designate a petitioning creditor as the person to file the lists and schedules, or do it yourself. See Fed.R.Bank.P. 1007(k). While doing this task is not an attractive prospect, at least the cost of doing so is allowable as an administrative expense.

20. Anticipate A Trustee Election

In an involuntary case the creditors are almost by definition more organized and motivated than in a typical voluntary case. Even before filing the case the petitioners may have settled on the person they want to serve as trustee, and that person may not be you. Remember that Fed.R.Bank.P. 2006(d) prohibits you from soliciting proxies on your behalf, and that it is inadvisable for you to preside at the meeting of creditors or conduct the election yourself. If you suspect that an election will be called, advise the U.S. Trustee and request that a U.S. Trustee representative preside at the meeting and conduct the election if one is requested. Finally, remember that you are the trustee until you aren’t, and, therefore, have the responsibility for discharging the trustee’s duties under § 704 as long as you serve.

[i] The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, the United States Department of Justice or the United States Trustee Program. Contact the author at Richard.C.Friedman@usdoj.gov.

Richard C. Freidman is Trial Attorney, United States Trustee Program, Region 11 (Chicago) and can be reached at Richard.C.Friedman@usdoj.gov.

Author: Peter Gitundu

Bankruptcy can happen as a result of your own fault or it could be as a result of genuine financial crisis that was otherwise not anticipated. By your own fault I mean, it could be due to carelessness in handling your money, or even operating your life or business without a clear budget.

Whatever the reasons could be, it is quite important to realize that there will be consequences which you will have to face and live with. When it comes to business bankruptcy, probably the most obvious consequence is that you will have to close down your business and have your employees dismissed.

However, this is subject to the chapter under which you file your insolvency petition. In most cases this will happen under chapter 7, which is also known as the liquidation chapter. If you file under chapter 13, you will have the chance to reorganize your finances and come up with a repayment plan as you continue with business.

If you are file for bankruptcy while in a partnership, the partnership will more likely than not be dissolved. This is unless the partnership deal that you signed provides otherwise. If there happen to be any loans that your partners had cosigned with you, they may be forced to pay up on your behalf. Once you have filed for insolvency, it may prove hard for you to start a back-up business as your name will remain in the insolvency records for a period not exceeding ten years.

About the Author: Peter Gitundu creates interesting and thought-provoking content on finance.

Article Source: http://www.articlesbase.com/personal-finance-articles/consequences-of-business-bankruptcy-912099.html

Bankruptcy: an overview

Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to “establish… uniform laws on the subject of Bankruptcy throughout the United States.” See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.

Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11, 12, and 13 involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors’ interests.

However, a recent decision by the Supreme Court has shifted this power towards the debtor. In Rousey v. Jacoway, (April 4th, 2005), the Court held that assets in Individual Retirement Accounts (IRA’s) are protected under 11 U.S.C § 522(d) and thus exempt from withdrawal from the bankruptcy estate. This decision has broad implications for the baby-boomer generation, providing millions of Americans nearing retirement with increased protection of their earnings.

Recent passage of the Bankruptcy Prevention and Consumer Protection Act in April 2005 has also resulted in major reforms in bankruptcy law, outlining revised guidelines governing the dismissal or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings. The law also expands the responsibilities of the United States Trustees Program to include supervision of random and targeted audits, certification of entities to provide credit counseling that individuals must receive before filing for bankruptcy, certification of entities that provide financial education to individuals before being discharged from debt, and greater oversight of small business Chapter 11 reorganization cases.

More and more recently, small and middle-sized businesses find themselves in financially stressed operating conditions.  In this economy many businesses will find themselves in a position where the business is currently encountering a weak cash flow, a downturn in orders, or sales figures fall short of projections.

An important issue for these businesses is not how quickly this economic downturn is noticed, but how the business reacts.  While many businesses faced with financial troubles think they have few options, and will all but immediately come to the conclusion that a bankruptcy filing is the only alternative, this is not the case.  A common reaction to financial troubles is to ‘over-react’.  Overacting leads to ‘we’re going to have to shut down the operation’, ‘we’re going to have to lay off two-thirds of our staff’ or ‘we’re going to have to file for bankruptcy.’  But this is not necessarily the case.  There are non- bankruptcy alternatives that may be available.  Some of these non-bankruptcy alternatives, such as a business workout, or turnarounds may afford a business a more rapid and more affordable way of achieving a legal and successful financial reorganization. A workout may also afford the business owners significantly more control over the restructuring than the more invasive government-oversight that occurs with a Chapter 11 case filing.

Excessive lay-offs, which is sometimes one of the ‘over-reactions’ business owners resort to when the operation becomes financially stressed, can prove problematic to long term operations.  Also many businesses will turn to focusing on only one client, or making inappropriate budget cuts that in a best case scenario often only lead to a slower closing of the doors.  When a business faces an economically challenging time cost cuts should be made but it is important to first create a new business plan to fit the current economic circumstances.

The first part of the planning process is to carefully weigh the positives and negatives of both bankruptcy and non-bankruptcy alternatives.  The company’s staff and professional advisors should take a step back and put the business’ cash flow, sales and service projections, and financial data on the table.  It is now that the business should retain the best possible accounting and law team to analyze the problem.  It is essential to not enter this process with a do it yourself attitude. Do not rely on staff reports as to where the problem lays.  We all are myopic in how we view our own business, our own practice, our own client base – we do not have a broad enough self vision.

Understanding the tax consequences as well as the financial problems the business faces should be at the forefront before determining whether to initiate bankruptcy proceedings. A critical outside party and outside the box analysis of the company’s strengths and weaknesses are needed to develop a game plan. Bankruptcy is surgery and before a business considers surgery the owners should always consider a remedy of antibiotics or physical therapy.

A business workout or turnaround is a non-judicial, non-bankruptcy method of  restructuring or reorganizing a business to overcome a particular financial challenge. The workout partly relies on informal negotiation and communication with the business’ creditors and staff to redirect the company’s cash flow, go forward with weaker projections, and establish a plan to service their creditors.  It is crucial that a business act in a timely fashion to their economic downturn.  In some rare occurrences small to medium-sized businesses have waited too long to apply the non-bankruptcy alternatives, leading to a judge-signed order for all equipment to be seized.  Most businesses are well before that stage in litigation or collection, as it were. Most businesses will have some sense and understanding of the level of their problem.

It is important to note that while most small and mid-sized businesses that are financially stressed lack significant cash flow, most still would have enough cash flow available to service the modest needs of an accountant, a lawyer or a law firm for their initial retainer fee or short-term advice and consult.  The workout process is not a long-term commitment, debt, or contract and that the accounting firm and lawyer working with the business would know within one to two weeks what challenges the company faces.  Most businesses in a financially stressed situation still have cash flow, and they still have the available funds to pay creditors and it is, generally, from those funds that the business would pay the workout team.  It is not a large investment to get into the workout mode, and most likely a good workout team will be able to diagnose the cash flow issues and determine who the principal creditors are with a two-hour face to face time with their client.

The process of the business workout is one of practicality that does not require a lot of investment in professionals to get the method up and running.  The process is not advocated often and is one that is not taught in business school, talked about at Chambers of Commerce, or
read about in publications such as Newsweek or Business Week.

One of the major disadvantages to proceeding with a bankruptcy is that it is a very public process. All of the business owner’s finances, investments, creditors, and contracts are recorded and available for public viewing. Once a business files for bankruptcy a competitor could access information such as the filing business’ debt load, customer list, inventory suppliers, financial institutions, line of credit and what interest rates they are charged.  All that is valuable information and competitors could use that to their advantage.  Yet another negative aspect to consider is that a bankruptcy filed business is monitored and managed by the court and trustee system. Bankruptcy allows the intervention of a bureaucracy that is requiring the company to produce financial reports justifying its budget. In other words, having a government partner you didn’t know you already had.  The government partner is the bureaucracy called the trustee and the trustee has certain powers to oversee, to require budgets, and to object if the business is going to invest in the wrong kind of action.  That is a draw back because you do not have the latitude or the flexibility a business needs to survive, in some ways.

A bankruptcy reorganization case does not create a new market for the business, increase gross revenue, or create a better skill set for the management team. To reiterate, bankruptcy should never be the first choice for a company, but there are several advantages of bankruptcy.  One of the advantages is the ability to free up cash from servicing old debt to give current operations the breathing room to move forward. A couple other advantages would be the flexibility concerning leases or other contracts that may no longer be advantageous to the business
operation and having the protection of the courts if a creditor decides to file suit.

From a business perspective, corporations, limited liability companies and partnerships are separate legal entities from their owners, shareholders and partners and have the ability to file a business liquidation option Chapter 7 or a reorganization option Chapter 11 in the name of the business entity.

Filing of bankruptcy has many different impacts on the business depending on the formation of the business entity.  Filing a Chapter 7 could prove to be more problematic for a business partnership. The liquidation option exposes individual partners to a possible liability not
withstanding the bankruptcy filing.  A sole proprietorship is seen as just an extension of individual. An individually owned business is not permitted to file a bankruptcy case under the business name. The individual business owner would be required to file their bankruptcy case under their name since, in actuality, the assets and liabilities of the proprietorship are really just one form of the assets of the individual.

With a Chapter 11, a business is protected for 120 days. The bankruptcy filing allows the business four months to rewrite its business plan of reorganization. After the allotted time expires, the business needs the permission of the bankruptcy court to extend the time in which to
write its own business plan.  There is no particular chronology or any statutory time protections built into workouts because workouts or turnarounds are non-judicial.  The amount of time a business will have to be successful will depend on how soon you discover the problem and how soon the business begins negotiations with the larger creditors that could give the business the most financial stress or legal problems while the business is in a workout.  An additional option for the individual business owner is the min-reorganization Chapter 13.

A main advantage of the workout is that it is a private process. The public has no knowledge, participation, or observation of the process and a workout or turn around has no bureaucratic overseers. It is a private negotiation process between the business and its various creditors.  The business is dealing directly with each creditor and coming to some compromise or resolution and going about their business as it were with no judicial or bureaucratic intervention.

The business has more control of what the settlement arrangements are, there are less people participating in the resolution of the case, and there are less people participating in how the business restructures and recasts the finances.

Stephen Costello’s visitors typically “walk out feeling better” after they’ve talked with him, which is a little surprising because Costello is a bankruptcy attorney. He’s the only attorney, in fact, at Costello & Costello P.C., Carpentersville.

“The business owner knows more (about bankruptcy), and the stress begins to lift,” Costello explains. “It’s my job to explain what would happen. It’s the business owner’s decision” as to whether bankruptcy is the right choice.

That’s not a choice most entrepreneurs ever expect to make, but the companion facts that small businesses account for “a lot” of the increased activity at Costello’s practice and that Chicago bankruptcy attorney Peter Berk, of the Law Office of Peter L. Berk, says business “was up 40 percent last year and is up over that so far this year” indicate that more businesses are at least exploring the bankruptcy option.

Bankruptcy can be complicated. To help, but with the caveat that every situation really is different, here is some basic small business bankruptcy information based on conversations with Berk and Costello:

• Business owners looking at bankruptcy generally have two options: Chapter 7, which refers to the chapter of the bankruptcy law that provides for liquidation of a business, or Chapter 11, which allows a business to keep operating while it reorganizes.

• Viability can be an issue. “You’ve got to be big enough to do a Chapter 11, and the business has to be viable,” Berk says. “There has to be enough revenue coming in to satisfy creditors” in a reorganization.

Costello adds that Chapter 11 often is “too expensive for very small businesses.” Figure a “$15,000-$20,000 retainer to get the case filed,” he says. A Chapter 7 filing is likely to cost about $5,000.

• One problem is that “businesses tend to wait until things get pretty dire” before seeking help, says Berk. “It’s often an emergency situation where a creditor has gotten a judgment or the owner sees that the business will default.” In that context, a dose of realism can help. “Everyone is optimistic that things will turn around,” Costello says. “They usually don’t.”

• The corporate veil that is one reason many entrepreneurs incorporate their businesses may offer some protection in a bankruptcy. “If there are no personal guarantees, then corporate officers generally are not liable” for a business’ debts, Berk says.

• It is possible to essentially liquidate your business today and start a new one tomorrow–although, Costello warns, there “always is a suspicion among creditors that you’ve squirreled enough assets away” to fund the new business.

“The legality matters,” Costello says. “Stealing assets (from the bankrupt business) and bringing them into a new one is something I won’t tolerate. Neither will the courts.”

Questions, comments to Jim Kendall, JKendall@ 121MarketingResources.com. © 2009 121 Marketing Resources, Inc.

Because involuntary cases are just a small percentage of bankruptcy cases as a whole, parties do not always realize that the administration of such cases differs in significant respects from the more familiar voluntary cases. The purpose of this article is to provide some pointers to those who occasionally practice in this area. This two-part series will present my top twenty tips for petitioners, judges, alleged debtors, assignees, secured creditors and trustees.

Tips for Petitioners

1. You May File An Involuntary Only Under Chapter 7 Or Chapter 11

Section 303(a) of the Bankruptcy Code only permits involuntary cases under either chapter 7 or chapter 11 of the Code. No involuntary chapter 9, chapter 12 or chapter 13 cases are authorized. Further, an involuntary cannot be commenced against a farmer, family farmer or not for profit entity.

If your goal is simply to liquidate the assets of the debtor, chapter 7 is the preferred choice. If, however, your goal includes the possible rehabilitation of the debtor, chapter 11 is a better choice, especially if there is a business involved.

Remember that chapter 7 is less costly than chapter 11. The filing fee is less and there is no exposure for payment of U.S. Trustee quarterly fees payable under 28 U.S.C. § 1930, which arguably could be levied against you by virtue of having commenced the case.

2. You May Request A Trustee Be Appointed Before The Order For Relief

The debtor can be ousted from possession of its assets before an order for relief is entered, even if the debtor has not answered the petition or is vigorously contesting it. In a chapter 7 case the standard for this remedy under § 303(g) of the Code is the need to preserve assets or prevent loss of estate property. In a chapter 11 case, the standards under § 1104(a) & (b) are fraud, dishonesty, incompetence, gross mismanagement, or, alternatively, the best interests of creditors, equity security holders and the estate. If you are considering requesting a trustee, then what evidence you have under the differing standards is a factor in determining which chapter to file.

In that regard also remember that your input in the selection of the trustee is different in chapter 7 than in chapter 11. In chapter 7 the trustee is typically appointed by the U.S. Trustee from the private panel of trustees. [ii] The petitioner has no right to participate in the selection and generally will not be asked to do so. (Of course, in the event relief is ordered, creditors may exercise their right to vote for a trustee at the meeting of creditors. But this may not occur until weeks or months later). In chapter 11, on the other hand, the U.S. Trustee has the statutory obligation to consult with parties in interest, including you, about the selection, and you can request an election if you are not satisfied with the person the U.S. Trustee appoints.

3. You May Request That Debtor’s Power To Act Be Limited

Whether the case is one under chapter 7 or chapter 11, the appointment of a trustee before the order for relief is a drastic remedy and one that you may not be able to or even wish to pursue. Nevertheless, there are other available ways to restrict the debtor’s conduct. Generally, the debtor is free to act, to obtain and dispose of property, as if the involuntary case had not been commenced. That power to act, however, is subject to the exceptions clause of § 303(f) that provides that the court may order otherwise. Thus, if you know or have reason to believe that the debtor is contemplating some action that may adversely affect your interests, you may request the court to prohibit the debtor from engaging in that conduct.

4. You May Cure A Defective Petition Through Joinder Of Additional Creditors

As a petitioning creditor you may file an involuntary case against the debtor unless the debtor has twelve or more creditors, in which case you need at least two other creditors to join in the petition. If the debtor’s answer asserts that there are twelve or more creditors, then pursuant to Fed.R.Bank.P. 1003(b) you should request a reasonable time within which to join at least two other creditors. If the others join, it is as if they were creditors from the commencement of the case, and the otherwise defective petition is considered cured pursuant to § 303(c).

5. There Is A New Rule For Involuntary Partnership Cases

Fed.R.Bank.P. 1014 “Partnership Petition” is amended effective December 1, 2002. The amended rule, retitled “Involuntary Petition Against a Partnership,” makes stylistic changes and deletes former section (a) that had implied that one or more general partners may not commence a voluntary partnership case absent the consent of all the general partners. The effect of the amendment will be to permit a voluntary filing, if the partnership agreement permits less than all of the partners to bind all partners. Therefore, where state law allows a bankruptcy filing, the rule will no longer preclude it. Note, however, that since the partnership agreement controls, failure to achieve the requisite vote under the agreement in favor of filing the case will still require those who want to file to do so by an involuntary petition to which the dissenters may object.

Based on the new rule, if you are a general partner contemplating becoming a petitioner in an involuntary case against your partnership, carefully examine your partnership agreement before you do so. That agreement may allow you to file the partnership as a voluntary case, thereby expediting the administration of the case and saving you from needless litigation.

6. You May Dismiss An Involuntary Case Only On Notice To All Creditors

Section 303(j) severely limits your ability to cause the involuntary, once commenced, to be dismissed. The case may be dismissed only after a hearing on notice to all creditors. This rule applies notwithstanding the debtor’s consent to dismissal or where you have done nothing to prosecute the case. According to the legislative history “the purpose of the subsection is to prevent collusive settlements among the debtor and the petitioning creditors while other creditors, that wish to see relief ordered with respect to the debtor but that did participate in the case, are left without sufficient protection.” House Report No. 95-595, 95th Cong., 1st Sess. 324 (1977); Senate Report No. 95-989, 95th Cong., 2d Sess. 35 (1978). Moreover, pursuant to Fed.R.Bank.P. 1017(d), notice to all creditors is necessary even if the court decides to dismiss the case under the abstention provision of § 305(a)(1).

Because it is frequently difficult, if not impossible, to obtain a list of creditors, this requirement is not always enforced. You, however, should not assume that the rule will not be enforced in your case. Furthermore, in the event you are able to reach a settlement with the debtor and do wish to dismiss the case, your notice to creditors should make explicit the terms of the settlement in order to avoid its being deemed “collusive” and, therefore, subject to objection by creditors and rejection by the court for that reason. Of course, you should also realize that a notice that fully discloses your favorable settlement is likely to invite objections by other creditors who do not stand to receive such treatment.

7. You Should File Proof Of Service

As a petitioning creditor you must serve the debtor with a copy of the petition and a summons. Fed.R.Bank.P. 1011(b) allows the debtor 20 days from service to answer or otherwise plead. That time is extended to 23 days if service is by mail, as it often is. See Fed.R.Bank.P. 9006(f). Section 303(h) requires the court to enter an order for relief if the petition is not timely controverted, but the court should not do so unless it has a basis to conclude that service has been properly effected. You can provide that basis by filing your proof of service with the court. Once the proof of service is on is file and the time to answer or otherwise plead has expired, you may be able to simply submit to the court a proposed order for relief with your proof of service. Inquire from the clerk if that will suffice or whether a motion to enter the order for relief is necessary.

8. You May Request The Court Designate A Person To File Lists And Schedules

Once the order for relief is entered the debtor has fifteen days to file the list of creditors, schedules and statement of affairs. Fed.R.Bank.P. 1007(a)(2) & (c). Oftentimes, the debtor does not willingly comply and the case languishes. Without at least the list of creditors, the meeting of creditors cannot be noticed and no trustee election held. In order to expedite the administration of the case, you can request the court to designate someone as the responsible person for filing the lists and schedules. See Fed.R.Bank.P. 9001(5). The designation can be done either in the order for relief or in a separate order. Once the designation is ordered, you can enforce compliance though the contempt procedure of Fed.R.Bank.P. 9020. Note that if you do not take the lead in designating someone to do these tasks, you risk being named as the person to do it yourself pursuant to Fed.R.Bank.P. 1007(k).

9. You Should Notify The U.S. Trustee When An Order For Relief Is Entered

Once the order for relief is entered, a trustee needs to be appointed. The U.S. Trustee makes the appointment, not the court, so if the U.S. Trustee is not informed that an order for relief has been entered, the appointment will not be made, the case will languish and creditors’ rights may be adversely affected. Although the court may advise the U.S. Trustee that an order for relief has been entered, do not assume that it will do so or do so as quickly as you would like. As a famous maker of sporting goods likes to say, “just do it!”

10. You Should Promptly Make A Request For Payment Of Administrative Expense

Section 503(b)(3)(A) provides that you may be allowed an administrative expense for filing an involuntary petition and § 503(b)(4) extends the allowance to cover your attorney’s fees. You will need to file a request for payment of administrative expense, not a proof of claim, and obtain a court order allowing the expense. You should do this promptly, while the matter is fresh, even if there is no money to immediately pay the allowance. (If there is never going to be any money in the estate, you should be asking yourself why you filed the case in the first place).

Note that allowable expenses do not cover general participation in the case, but merely what was necessary to file and prosecute the petition to the order for relief. While some courts may construe these allowance provisions somewhat liberally, there really is no statutory basis to do so and an excessive request is likely to invite an objection by the U.S. Trustee.

In this regard also remember that a more generous allowance is possible under a “substantial contribution” theory, but the standard is more difficult to satisfy than merely the “actual and necessary” standard for administrative expenses. Furthermore, “substantial contribution” allowances under § 503(b)(3)(D) are only available in chapter 9 (where there are no involuntaries) or chapter 11, and not under chapter 7.

[i] The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, the United States Department of Justice or the United States Trustee Program. Contact the author at Richard.C.Friedman@usdoj.gov.

[ii] Section 701(a)(1) of the Code requires that an interim trustee selected after the order for relief either be a disinterested person who is a member of the panel of private trustees established under 28 U.S.C. § 586(a)(1) or have been serving immediately before entry of the order for relief. A “gap” trustee, therefore, is not required to be a panel trustee.

Richard C. Freidman is Trial Attorney, United States Trustee Program, Region 11 (Chicago) and can be reached at Richard.C.Friedman@usdoj.gov.

BANKRUPTCY LAW IS A FEDERAL LAW. THIS SHEET GIVES YOU SOME GENERAL INFORMATION ABOUT WHAT HAPPENS IN A BANKRUPTCY CASE. THE INFORMATION HERE IS NOT COMPLETE. YOU MAY NEED LEGAL ADVICE.

When You File Bankruptcy

You can choose the kind of bankruptcy that best meets your needs (provided you meet certain qualifications):

• Chapter 7 – A trustee is appointed to take over your property. Any property of value will be sold or turned into money to pay your creditors. You may be able to keep some personal items and possibly real estate depending on the law of the State where you live and applicable federal laws.

• Chapter 13 – You can usually keep your property, but you must earn wages or have some other source of regular income and you must agree to pay part of your income to your creditors. The court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you live up to the terms of your repayment plan.

• Chapter 12 – Like chapter 13, but it is only for family farmers and family fishermen.

• Chapter 11 – This is used mostly by businesses. In chapter 11, you may continue to operate your business, but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.

If you have already filed bankruptcy under chapter 7, you may be able to change your case to another chapter.

Your bankruptcy may be reported on your credit record for as long as ten years. It can affect your ability to receive credit in the future.
What Is a Bankruptcy Discharge and How Does It Operate?

One of the reasons people file bankruptcy is to get a “discharge.” A discharge is a court order which states that you do not have to pay most of your debts. Some debts cannot be discharged. For example, you cannot discharge debts for–

• most taxes;
• child support;
• alimony;
• most student loans;
• court fines and criminal restitution; and
• personal injury caused by driving drunk or under the influence of drugs.

The discharge only applies to debts that arose before the date you filed. Also, if the judge finds that you received money or property by fraud, that debt may not be discharged.

It is important to list all your property and debts in your bankruptcy schedules. If you do not list a debt, for example, it is possible the debt will not be discharged. The judge can also deny your discharge if you do something dishonest in connection with your bankruptcy case, such as destroy or hide property, falsify records, or lie, or if you disobey a court order.

You can only receive a chapter 7 discharge once every eight years. Other rules may apply if you previously received a discharge in a chapter 13 case. No one can make you pay a debt that has been discharged, but you can voluntarily pay any debt you wish to pay. You do not have to sign a reaffirmation agreement (see below) or any other kind of document to do this.

Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but the creditor can still take the property.
What Is a Reaffirmation Agreement?

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law. Reaffirmation agreements–

• must be voluntary;
• must not place too heavy a burden on you or your family;
• must be in your best interest; and
• can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

IF YOU WANT MORE INFORMATION OR HAVE ANY QUESTIONS ABOUT HOW THE BANKRUPTCY LAWS AFFECT YOU, YOU MAY NEED LEGAL ADVICE. THE TRUSTEE IN YOUR CASE IS NOT RESPONSIBLE FOR GIVING YOU LEGAL ADVICE.