According to Dow Jones Daily Bankruptcy Review, “After recent years of financial distress and bankruptcy filings, U.S.-based automotive suppliers are not only doing better, but they are profitable, their stocks are surging, they are hiring and they are putting the finishing touches on restructurings.”

As my law partner, Heather Culp, wrote in her blog last month, Chapter 11 is a vehicle through which debtors can reject or cancel certain leases, contracts, and other debt obligations, and get breathing room to obtain new financing, sell property, or otherwise arrange to repay creditors. You need not be a giant international corporation to file a Chapter 11 bankruptcy petition.

As someone with over 30 years of dealing with financially troubled businesses , I believe G.M.’s experience brings lessons to other businesses struggling to make a profit.

Chapter 11 lessons learned

First, to stay out or get out of financial trouble, you must have a PLAN.  If you’re running your business by taking every day as it comes instead of following a strategic path that includes financial goals, you’re headed for hard times. General Motors was forced into its plan, but  executed it well.

Second, for whatever the reason a business stumbles, the first step to a turnaround  is working with professionals who can help you determine whether a reorganization would enable the business it to thrive, and whether the business can afford a Chapter 11 case.  This is a time for candor and clear thinking, not wishful thinking.

Third, sometimes, as with G.M., the management team that brought the company to the brink of failure must be replaced or  the reorganization  plan will fail. If a company is owned and managed by people who are kicking and screaming to keep  doing business as usual, it’s a doomed enterprise.  Chapter 11 is designed to buy time to do things differently.

We have significant experience in representing debtors and creditors in Chapter 11 cases and I have been appointed a Chapter 11 trustee in numerous bankruptcy cases, both large and small.

Related posts:

1. Chapter 11 Bankruptcy: Businesses and Individuals
2. Chapter 13 Bankruptcy: Individuals
3. Chapter 11 May Help Small Businesses Weather Downturn
4. Chapter 7 Bankruptcy: Businesses & Individuals

This article from  Christian Science Monitor caught my eye because of the contradictory messages about small business lending.  While the federal reserve system is “encouraging” banks to lend to small businesses, banks counter that small businesses simply aren’t asking for loans.

Banks have…been restricted by tightened lending standards, says Bob Seiwart, a senior vice president at the American Bankers Association, who manages the group’s Center for Commercial Banking and Business Lending.  “Money is available to viable small businesses,” says Mr. Seiwart. “But the terms will be different than in the past, as they should be reflecting the added risk of lending in today’s economy: rates will be higher and loan terms will be shorter.” Regulators have also started to require that banks maintain a higher level of capital in order to lend. In the current economic climate, the new standards have been difficult to sustain, said Seiwart.

CNNMoney reported, “Loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to bank financial reports submitted to the Federal Financial Institutions Examination Council.”

Chapter 11 for breathing room and restructuring

If you are a business owner who cannot fund operations, consider talking to a qualified bankruptcy attorney.  One option that might fit your circumstances is Chapter 11 bankruptcy, which allows for an orderly reorganization.  Chapter 11 provides the debtor time and space to reorganize its financial affairs and repay its creditors some or all of the debt owed. It is a vehicle through which debtors can reject or cancel certain leases, contracts, and other debt obligations, and get breathing room to obtain new financing, sell property, or otherwise arrange to repay creditors.

No one wants to file for bankruptcy protection, but it serves an important purpose in re-ordering a troubled economy in a regulated manner.

Get the facts about filing or avoiding bankruptcy by speaking to an experienced bankruptcy attorney. Many will offer you a free initial consultation.

Related posts:

1. Chapter 11 Bankruptcy: Businesses and Individuals
2. Chapter 7 Bankruptcy: Businesses & Individuals
3. Chapter 11 Bankruptcy for a Healthy Turnaround
4. Lessons from Reader’s Digest

It is a vehicle through which debtors can reject or cancel certain leases, contracts, and other debt obligations, and get breathing room to obtain new financing, sell property, or otherwise arrange to repay creditors.

Chapter 11 for businesses

Our typical Chapter 11 client is a small, closely held business with cash flow problems. The source of the problems varies; common problems include the decline of the housing market, growth and expansion at a fast pace, embezzelment by an employee, a change in ownership or leadership, or a balloon payment due to a bank that is unwilling to refinance.

Whatever the reason, the first step is working with you to determine whether a reorganization of the business would enable it to thrive, and whether the business can afford a Chapter 11 case. If the answer to both of these questions is “yes,” then we will prepare the Chapter 11 petition and schedules, and file it in the bankruptcy court.

Compared to Chapter 7 cases, Chapter 11 cases are longer in duration, and more complex in terms of legal work. The ultimate goal is to formulate and present a written plan for our Chapter 11 debtors to reorganize their affairs and repay their creditors according to the priorities of the Bankruptcy Code.

Chapter 11 for individuals

Chapter 11 is the last resort for those individuals who are not eligible for relief under either Chapter 7, Chapter 12, or Chapter 13. Typically, Chapter 7 is ruled out because the debtor exceeds income limits or wishes to prevent a bankruptcy trustee from liquidating non-exempt assets; Chapter 12, because it applies only to family farmers or family fishermen with regular annual income; and Chapter 13, typically because, on the date of the filing of the petition, the debtor and spouse (except a stockbroker or commodity broker) have noncontingent, liquidated, unsecured debts that equal or exceed $336,900 and noncontingent, liquidated, secured debts that equal or exceed $1,010,650. This IRS page might help those considering Chapter 11.

The internet is a great way to begin researching your options, but can in no way replace the need to speak with a qualified bankruptcy attorney.

“This information is general and thus incomplete, and the reader should seek legal counsel for specific legal problems or questions.”

Related posts:

1. Chapter 7 Bankruptcy: Businesses & Individuals
2. Chapter 13 Bankruptcy: Individuals
3. Chapter 11 May Help Small Businesses Weather Downturn
4. Chapter 11 Bankruptcy for a Healthy Turnaround

The general news press has gotten sloppy in the language it uses for distressed real estate, so let’s start there:

• Forced sale is not used often, but when it is it would include a sheriff’s sale or a foreclosure sale.
• Foreclosure is the process by which the lender repossesses real property upon the borrower’s default.
• Short sale, though, is a consensual deal between the lender and the borrower in which the lender agrees to take less than what’s owed; a short sale is not a forced sale in the strictly legal sense of the word.

The foreclosure process, step by step

The foreclosure process is straightforward. It begins when the lender files a lawsuit in the state court in the county in which the property is located, giving notice to anyone legally responsible for the debt — borrowers, co-signers, guarantors — and upon at least ten days’ notice to the responsible parties, a hearing is held at the courthouse.

A deputy clerk, an assistant clerk, or the clerk of court presides over the hearing; the lender must show only four elements: (1) that there is a valid debt secured by the property, (2) that the borrower is in default on that debt, (3) that there is a power of sale in the agreements between the borrower and the lender, and (4) that the responsible parties had ten days’ notice or more prior to the hearing. This can all be shown by affidavit and usually is — in other words, there is no live testimony. As part of the power of sale clause, the lender hires a “trustee” or “substitute trustee” — a neutral party — to foreclose on the property. The trustee/substitute trustee attends this hearing and provides the proof of these four elements. The clerk has no authority to consider anything other than these four elements; if they are met, then the clerk shall enter an order of sale, allowing the property to be auctioned on the courthouse steps. It is generally pointless for borrowers to attend these hearings and try to delay the process.

If a borrower believes he has equitable grounds to stay the foreclosure, then he has the right to file a lawsuit in the county’s superior court, asking that a temporary restraining order, preliminary injunction, and/or permanent injunction be issued to stop the foreclosure. These lawsuits are expensive and generally a long shot. In the absence of either a successful superior court suit or a workout between the borrower and the bank, the property will be auctioned on the courthouse steps about 25-30 days after the hearing. The bank usually places a credit bid at the sale — buying the property back for something short of the full amount of the debt. Anyone can bid, but live bidders are relatively rare.

There is a ten-day “upset bid” period following the sale, in which anyone can file a bid on the property that exceeds the sale price by the greater of 5% or $750.00. The filing of any upset bid triggers a new ten-day upset bid period, until the period passes with no new filed bids. Once the ten-day upset bid period expires, the sale is final; the trustee/substitute trustee signs a “trustee’s deed” giving the property to the winner of the sale, and files documents related to the sale.

The relationship between foreclosure and bankruptcy protection

A bankruptcy filing by a borrower stops a foreclosure proceeding until such time as the lender obtains from the bankruptcy court an order giving it relief from the automatic stay of all creditor activity.

Generally speaking, a Chapter 13 debtor can propose a plan that provides for payment in full of pre-bankruptcy mortgage arrearage, and at the same time keep current on post-bankruptcy payments, and keep the house. Falling behind on either aspect will likely lead to the lender getting relief from stay and then having the right to re-start the foreclosure process.

Also speaking generally, a Chapter 7 debtor can’t do anything to stop the mortgage company from getting relief from stay and thus restarting the foreclosure process, unless the debtor is able to do what he couldn’t do prior to the institution of the foreclosure — do a mortgage modification with the lender; refinance; or otherwise come up with a large lump sum to get current on the mortgage and then keep current with the monthly payments.

I just can’t have my credit ruined by a bankruptcy!

People often tell me that “I just can’t have my credit ruined by a bankruptcy!” and these people have a pending foreclosure, are in default on several credit card obligations, and are past due on other debts. While a foreclosure is probably less prejudicial to your creditworthiness than a bankruptcy, the reality is neither is good and a bankruptcy may be the only way to get a fresh start.

Another consideration in favor of bankruptcy: foreclosures are governed by state law and the practice and procedure varies wildly from state to state while bankruptcy is federally regulated. If you own real property in more than one state, consult with a bankruptcy attorney to see if the bankruptcy process may produce a less expensive outcome. Remember this summer’s talk about GM and Chrysler entering an “orderly bankruptcy?” Bankruptcy is indeed an orderly process.

In Part 2 of 3: Questions and Answers on preventing foreclosure, negotiating with a mortgage company, and what to do about an adjustable rate mortgage that will soon reset.

In Part 3 of 3: Questions and Answers on short sales and sifting through the confusing offers from those who want to help distressed homeowners.

Related posts:

1. Primer for Distressed Homeowners: Part 3 of 3
2. Primer for Distressed Homeowners: Part 2 of 3
3. Bankruptcy Trustee Basics
4. Debunking Strategic Default Myths

At the present level of debt, Reader’s Digest is not a viable company.  At the reduced level, it will be viable, thus allowing a partial but significant payment to creditors while saving jobs and assuring further business for its suppliers.

While yes, there will be financial losses, these will be far less than what would have occurred had Reader’s Digest simply closed its doors and cut off the lights.

Two ways of looking at indebtedness

Far too many people look at a company that has heavy debt and say, “The company is not viable.”

I take the view that Reader’s Digest’s management took, and ask, “At what level of debt is the company viable?” Once that is determined, the next question to ask is “How do we reduce the company debt to that level?” As with Reader’s Digest, Chapter 11 can be a way of reaching that level.

Being financially upside-down is not pleasant.  Nevertheless, it does not have to be the kiss of death.

Chapter 11 might be a viable financial planning tool for your business, too.  Seek guidance from a qualified attorney before making any decisions.

Related posts:

1. Chapter 11 Bankruptcy: Businesses and Individuals
2. Chapter 11 Bankruptcy for a Healthy Turnaround
3. Chapter 11 May Help Small Businesses Weather Downturn
4. I don’t want to file, but should I?