Q: What questions does Mitchell & Culp, PLLC ask a prospective Chapter 11 client to determine whether they should “collapse the company” or restructure in Chapter 11?

A: We start by asking about the assets and liabilities of the company, whether the business is currently operating and if so to what extent, and what it would take for the company to (1) break even and (2) be profitable. Sometimes, it is immediately obvious that the business simply needs to close, and the owners need to focus instead on their finances and find a new line of work. For example, if the business sells widgets, and has not sold enough widgets for the past year or two to pay its overhead, then no reorganization is going to save the business.

“Collapsing the company” – a closely held corporate entity transfers its assets and liabilities to the owner(s), usually a husband and/or wife, and then the individual(s) file for Chapter 13 and do business as sole proprietor(s) – is appropriate only for small businesses, what we think of as mom and pop businesses. That will not work where there are multiple owners or shareholders, or where the owner(s) personally have significant assets that they would lose in a personal bankruptcy case.

Q: What other types of entities can consider Chapter 11 bankruptcy? Can non-profits file for Chapter 11 bankruptcy?

A: Corporations (including LLCs), partnerships, individuals, and individuals doing business can all be a debtor under Chapter 11. This all includes both for profits and non-profits. Restaurants, retail businesses, golf courses, real estate developers, consultants, churches, and manufacturers have been debtors in the Western District over the years, and none of them infrequently.

Q: What advice do you usually give to prospective clients when Chapter 11 isn’t viable for them?

A: It depends on whether the financial problems are limited to the business, or spread to the owners; also depends on whether the entity wants to try to continue in business or not.

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Chapter 11 is not as straightforward to explain as Chapter 7 or Chapter 13, so we designed this FAQ:

Q: How “big” does the owner’s business have to be to even consider Chapter 11?

A: We cannot quantify how big a debtor should be in a Chapter 11. We have filed Chapter 11 cases for at least four individuals in the last five years, so it’s more a question of assets (including revenue stream).

Liabilities can also come into play; there are unsecured and secured debt limits on eligibility to be a Chapter 13 debtor, so sometimes that must be factored in and may make a Chapter 11 case more appropriate.

Everything is a very fact-specific, case-by-case analysis.

Q: How much does it cost to file a Chapter 11 case?

A: Chapter 11 cases are costly. The filing fee alone (what’s paid to the court at the time of filing) is $1039.00, compared to $274.00 for a Chapter 13 and $299.00 for a Chapter 7.

In addition, we handle Chapter 11 cases on an hourly basis, as do most experienced Chapter 11 attorneys. It is impossible to predict at the time of filing how much time will be spent by the attorneys throughout the case, because there are so many variables. However, at a minimum, our firm’s attorneys’ fees and expenses for a Chapter 11 are rarely less than $20,000.00, and in some instances, are significantly higher.

Q: What usually disqualifies a business for consideration as a Chapter 11 case?

A: If the business has stopped operating, or has no assets, then there is no point in attempting reorganization. Also, we discourage single asset real estate debtors from Chapter 11 if they have been unable to secure (re)financing after giving it their all. Chapter 11 can do lots of things, but it can’t raise capital or force financing that doesn’t exist.

Q: Who shouldn’t even bother asking for representation for Chapter 11?

A:  People who aren’t comfortable with transparency, because bankruptcy requires full disclosure of financial affairs.

People who can’t trust their attorneys, because we need free and full communication with our clients in order to represent them.

People who can’t listen, aren’t open to new ideas and ways of doing business, and/or can’t take advice – entrepreneurs, especially, tend to be risk-taking cowboys. If it works, great, but if Chapter 11 is on the table, then some things need to change.

The only way to understand your bankruptcy options is through a bankruptcy counseling session with a qualified bankruptcy attorney. 

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How do we know this? Because we so often find ourselves unwinding the messes that Johnny-come-lately practitioners have created for their clients.

Filing a Chapter 13 case isn’t as straightforward as a Chapter 7 case. We usually find that our Charlotte area clients who need Chapter 13 protection have issues with businesses and partnerships that need to be unwound or otherwise dealt with; they often have unpaid tax liabilities with the state and IRS; and they may have a number of mortgaged properties and other assets they wish to protect.

I encourage you to interview only qualified legal counselors for your Chapter 13 case, and to that end, I put forth the credentials of myself and my law partner for your consideration.

Rick Mitchell and Heather Culp

At Mitchell & Culp, you always deal with a partner, never an associate learning the ropes or a lawyer who decided to jump into the growing market for bankruptcy practitioners.

My law partner, Rick Mitchell, was the first Chapter 7 bankruptcy trustee appointed to the Western District of North Carolina bankruptcy trustees’ panel in the 1970s, and has served continuously in that capacity since his appointment. His 30+ years as a bankruptcy trustee, and as an attorney representing creditors, trustees, and debtors in consumer and business bankruptcy cases, gives Mitchell & Culp, PLLC clients a wealth of practical and legal knowledge to draw upon. In addition, the North Carolina State Bar has certified Rick as a specialist in consumer and business bankruptcy.

I came to bankruptcy law through my work representing clients in construction litigation, a field rife with bankruptcy filings. For the past ten years I’ve concentrated in the areas of business litigation, bankruptcy and bankruptcy litigation, and have many years’ experience in representing businesses, business owners, and individuals in a wide variety of contract and payment disputes.

I also regularly represent court-appointed officials (such as bankruptcy trustees and receivers) in bankruptcy and business court cases. A smaller, but important, part of my practice includes advising clients on the pros and cons of, and procedures for, debt settlement, as well as substitute trustee engagements in commercial foreclosures.

Are you a good candidate for Chapter 13 bankruptcy?

Chapter 13 Chapter 13 is a wonderful tool for certain individuals with debt problems.  It can be attractive and useful for individuals with one or more of the following problems:

1. too much disposable income to qualify for a Chapter 7 bankruptcy;
2. real or personal property with equity that creditors could otherwise reach, and that the individual wants to keep;
3. certain kinds of taxes that are not dischargeable in a Chapter 7 bankruptcy;
4. domestic support obligations in the nature of equitable distribution/property settlement;
5. personal guarantees of the debts of a business that they own and wish to continue to operate.

In a bankruptcy counseling session, we can advise you as to the different types of bankruptcy available to you, and give our recommendation as to which type is the best fit for you. Your first decision is to call for a bankruptcy counseling session.

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Chapter 11 is not just for businesses

Greater Salem Church was threatened with the loss of its church building. The Chapter 11 filing caused the automatic stay to stop the foreclosure proceeding. This will allow the church membership the opportunity to reorganize its finances and save the property.

I attended services at Greater Salem Church last Sunday and explained what had been done and why. The congregation voiced enthusiastic support. As I said in a newspaper interview, “The congregation of that church and the people behind the church have a great deal of emotional capital tied up in that location, and they are going to do anything they can to save it.”

“

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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.

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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.

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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.”

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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.

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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.

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