In early 2020, the topic of discussion in my professional network was if the U.S. would finally have the long-overdue recession, and just how mild the squall would be.
Then, hurricane COVID-19 tore through and destroyed everything. The damage done, and the damage yet to come, leads to grim predictions that we will see four years of business turnover in one year. Unemployment will persist at levels not seen for a hundred years. Money will be tighter than it has ever been in living memory. All real estate is local, and Colorado real estate will suffer extra blows as the oil and gas industry disintegrates and tourism falters. There are no silver linings in hurricane covid’s storm clouds.
Maybe you are a developer and your projects are dead in the water, for years perhaps. Maybe your rental properties are going vacant and there is no liquidity to service the debt. Maybe your real estate portfolio is deep underwater. No matter where you are in the real estate industry spectrum, the focus has shifted to riding out the storm, righting the ship, and preparing to catch the winds of the recovery.
So, what is a real estate professional to do? First, take a deep breath. This was a black swan event, totally out of your control. Next, contact us. We will help you conduct a clear-eyed assessment about the short, medium, and long-term viability of your business. We will draw on our experience working within every real estate downturn for the last 30 years, from the S&L Crisis to the housing bubble and the Great Recession. We use our experience of navigating stormy seas to chart a new course for your business and personal financials. We consider your facts and the suitability of restructuring, workouts, liquidation bankruptcy, or reorganization bankruptcy to achieve your goals.
If closing down permanently makes business and personal sense, then a well-planned liquidation ensures your personal finances make it out the other side of the storm as unscathed as possible, ready for your fresh start, ready to start your next opportunity.
If your business can survive the hurricane, battered yet still afloat and ready to sail the smooth post-covid waters, then a reorganization bankruptcy will plug the leaks, clear the decks and re-rig your sails.
There are three reorganization options: Chapter 11, Chapter 11-V, and Chapter 13. The best one to use will depend on your goals and the facts. Each has certain pros and cons and nuances that make it the best option for the task at hand.
There are three tools that are available in most cases. First, the power to reject contracts. Second, the power to reduce debt. Third, the flexibility to catch up on missed payments.
Rejecting and renegotiating contracts
Is that contract no longer economical? Delete it. It’s almost that simple. And the counterparty knows it. This huge power gives you immense leverage to renegotiate an agreement that will be commercially reasonable in the post-covid economy. Whether during an out-of-court workout or when negotiating a pre-packaged bankruptcy, the counterparty knows that your bargaining power is supreme and it will be a long time before they will find someone else to do business with. And, if the contract is not necessary for your reorganization plan, you can walk away with very little penalty. In bankruptcy, you have all the power.
The good news: Filers often emerge post-bankruptcy with a fraction of their pre-filing debt.
The bad news: It takes bankruptcy to achieve it.
There are two types of debt: Secured (real estate, equipment) and unsecured (credit cards, suppliers).
Secured debt. Due to the sinking values, an enormous amount of real estate is underwater; it is worth less than the debt on it. A bankruptcy filer can reduce the amount of the mortgage and liens to the current value of the property. Interest rates can be pushed downward to today’s ultra-low rates. The now-unsecured portion becomes a low-priority unsecured debt, akin to a credit card debt.
Unsecured debt. Unsecured debt does not fare well in bankruptcy, not at all. Depending on the exact category, an unsecured debt may recover pennies on the dollar, or nothing.
For detailed discussions, refer to Cramdowns & Lien Stripping, Debts that are dischargeable and debts that are not dischargeable in bankruptcy
Catching up on payments
Entering bankruptcy, your business will probably be behind on payments. A repayment plan is designed to fund current operations, to catch up on back payments, and to repay the debts with the money that remains. The one debt category that must be repaid in full is tax debts. Secured creditors will be repaid according to the revised value of the property. Unsecured creditors will often be repaid very little. To run your business moving forward you will probably want to maintain an ongoing relationship with your suppliers and employees. The good news is that ongoing suppliers, employees, and similar day-to-day bills will be paid first in bankruptcy. Most suppliers know they will be paid first during the bankruptcy, and so they will continue doing business with you. They have to write off the bills owed from before the filing because they have little expectation of getting those bills paid.
For detailed discussions, refer to Debts that are discharged and debts that are not discharged in bankruptcy
Cash, hold on to as much as possible
Cash management is critical to a reorganization bankruptcy. If you run out of cash, the reorganization effort stops and the company is liquidated. To revisit the earlier nautical metaphor; don’t run out of drinking water in the middle of the ocean. There is a reason it is called liquidity. Sometimes operating profits will be sufficient to fund operations, but often they will not. Having cash on hand ensures that employees show up, the lights stay on, and pays suppliers who may now demand cash on delivery. All of this assumes that you actually have the cash to manage. There are two routes to ensuring you have the vital liquidity. First—and far and away the most ideal—do not run out of cash before you file bankruptcy, and in fact, build up the cash reserves before filing. Increasing liquidity pre-filing usually means stopping payments to lenders and suppliers. The cash you conserve now will help the firm sail through the bankruptcy process later. Whatever you do, never ever lend your personal money to the company prior to filing bankruptcy—unless you dislike your personal money and don’t want to see it again. In cases where it will not be possible to stockpile sufficient cash ahead of filing there are specialized loans to fund operations—debtor in possession loans. A DIP loan is a specialized bankruptcy loan that funds ongoing operations while the bankruptcy case proceeds. The DIP lender is repaid first, before all other creditors. This makes it a very attractive loan for the lender. A DIP lender can be an existing creditor or a lender who specializes in these loans. At Business Bankruptcy Solutions, we maintain a network of DIP lenders. DIP loans are negotiated prior to filing the case. Due to the time, complexity, cost, and difficulty of locating, qualifying for and obtaining a DIP loan, a filer should never assume this option will simply be available.
Contact us for help
Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances and the tools we can use to achieve your goals. We draw upon decades of legal and business experience to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.