Business Bankruptcy Solutions

Small Business Entrepreneur Bankruptcy

You are an entrepreneur, you do things differently than the herd. You strive to create. You are never satisfied with the status quo. I know, because I am one of you. I joke that my law practice funds my entrepreneurial habit. I’ve created firms in diverse industries: legal education, medical services, manufacturing, real estate, consumer goods, and even a startup incubator. Throughout them all I experienced the highs and lows of the entrepreneur’s life. This affords me unique insights into how the special circumstances of the entrepreneur interact in a bankruptcy case.

The options in bankruptcy for a small business are as varied as the underlying entrepreneurial ventures. Some ventures are closer to retail. Others to hospitality. Or, maybe your venture is in manufacturing. Maybe it is real estate focused. Maybe technology. Rest assured, I have been a principal in most of these sectors. Make sure to read the specific posts for each of those sectors. The posts discuss pre-bankruptcy and bankruptcy, and the dynamics of how the operational and the legal interplay.

At the start of 2020 the debate was whether the U.S. would finally have it’s long-overdue recession and how mild the squall would be.

Then, hurricane COVID-19 tore through and destroyed everything. Huge swaths of American commerce were financially swamped by successive waves of stay-at-home orders and social distancing requirements. These sectors will stay financially underwater while consumers are reluctant to leave home and their household incomes drop while unemployment persists at levels never seen in living memory. There are no silver linings in hurricane covid’s storm clouds.

So what is an entrepreneur to do? First, take a deep breath. This was definitely a black swan event that was 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 within the context of the bankruptcy tools available.

If closing the doors permanently makes business and personal sense, then a well-planned liquidation ensures you personally make it out the other side of the storm as unscathed as possible, ready for your fresh start and your next opportunity.

If your firm 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. First, the power to reject contracts, including leases. Second, the power to reduce debt. Third, the flexibility to catch up on missed payments.

Rejecting and renegotiating contracts

Lease no longer economical? Delete it. It’s almost that simple. And the landlord knows it. This huge power gives you immense leverage to obtain a lease that’s reasonable for the post-covid economy. Whether during an out-of-court workout or when negotiating the pre-packaged bankruptcy, the landlord knows it will be years before they can lease that space if they don’t make a reasonable deal with you. And, if the space is not necessary to your reorganization, you can walk away with very little penalty. Back when you negotiated the lease, the landlord had all the power. Now, in bankruptcy, you have all the power. All other contracts, including equipment leases and service contracts, have a similar analysis and follow a similar pattern.

Reduce debt

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 plummeting values of real estate and other property, your firm’s assets might be worth less than the debt. You can reduce the amount of the mortgage or lien all the way down to the current value of the property. Interest rates can be pushed down to reflect today’s low rates. The now-unsecured portion becomes an unsecured debt, akin to a credit card debt.

Unsecured debt. Like credit card debt, unsecured debt does not fare well in bankruptcy, not at all. Depending on the exact category, an unsecured debt may recover little 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

Going into bankruptcy your firm 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, like payroll taxes. Secured creditors will be repaid according to the revised value of the property. Unsecured creditors will often be repaid very little. Now, to run your business, you still need 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 understand that they will be paid first during the bankruptcy, and so they will continue supplying goods and services. They will 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 stops and the company is liquidated. To extend 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, 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 payment 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 landlords, lenders, and suppliers. The cash you conserve now will help the firm sail through the court process later. Whatever you do, never ever lend your personal money to the company prior to bankruptcy—unless you dislike your personal money and don’t want to see it again. When 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, which 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. DIP loans are negotiated prior to filing the case. At Business Bankruptcy Solutions, we maintain a network of DIP lenders. 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.