Can Filing For Bankruptcy Protection Save My Small Business?

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Let’s answer the top-line question right out of the gate: yes, filing for bankruptcy protection can most certainly save your business. The benefits of the bankruptcy laws do not exist solely for big companies. In fact, they can apply with equal effectiveness to save your small business when it runs into financial difficulty. Here is how.

A Quick Sketch of Business Bankruptcies

Bankruptcy is a judicial process by which a debtor seeks legal protection from financial obligations to creditors. For businesses, a bankruptcy generally takes one of two forms, referred to by the chapter of the United States Bankruptcy Code that governs them:

• Chapter 7 business bankruptcies accomplish a partial repayment and (effectively) a cancellation of debts through the supervised liquidation of a business’s assets;
• Chapter 11 business bankruptcies accomplish the judicially-supervised reorganization of a business’s debts so that the business can continue to operate.

People unfamiliar with bankruptcy law sometimes harbor the misconception that bankruptcy means the death of a business. In fact, the Bankruptcy Code exists principally to give individual and business debtors alike a “fresh start.” Far from killing a business, going through a Chapter 11 bankruptcy, in particular, accomplishes something much closer to a “rebirth.” The reorganized company emerges from bankruptcy free of crushing debt burdens, able to continue operating on terms that give it at least a reasonable shot at long-term success.

The Chapter 11 Bankruptcy Process

Seeking Chapter 11 bankruptcy protection as a small business begins with filing what is known as a “petition” in the United States Bankruptcy Court located in the jurisdiction where the business resides. That filing alone triggers one of the most powerful protections the law offers for a business: an “automatic stay” (or “freeze”) that prevents the business’s creditors from taking action to collect on debts. This freeze gives the business the time and breathing room it needs to reorganize its debts in a fair and reasonable manner, according to the process dictated by the Bankruptcy Code.

In conjunction with filing its petition, the business must also file “schedules” that essentially disclose the details of its financial condition, and in particular, to whom it owes money and in what amounts. These are the business’s creditors, and they, too, have rights under the Bankruptcy Code. Specifically, they get to form a “committee” – if they so choose – that has a say in the terms on which the debtor can reorganize.

Filing a bankruptcy petition also transforms a Chapter 11 business debtor, in a sense, into a special legal entity called a “debtor-in-possession.” The business continues to operate, but subject to special duties to its (now-“frozen”) creditors dictated by the Bankruptcy Code. Those duties limit the debtor’s ability to take some actions without permission, such as borrowing money or selling assets, and obligates the debtor to take others, such as preparing and filing monthly financial reports of its operations, assuming or rejecting “executory” contracts, and responding to claims by specific creditors.

The ultimate aim of a Chapter 11 business bankruptcy is court and creditor approval (called “confirmation”) of a “plan of reorganization” that addresses the business’s obligations  of each of its “classes” of financial stakeholders, including creditors and equity holders. The plan typically proposes to adjust terms and conditions of the business’s debts, management, and (sometimes) ownership in a manner that allows for the business to emerge from bankruptcy as a viable enterprise. A plan may, for example, propose to extend debt repayment dates, allocate certain business proceeds to the repayment of debts, or adjust equity ownership interests. For a court to “confirm” a plan of reorganization, at least one class of creditors with an “impaired” claim (that is, whose rights as creditors get affected under the proposed plan of reorganization) must accept the plan, as reflected in a vote of approval by holders of at least 1/2 of the number of allowed claims in that class, who also hold at least 2/3 of the amount of allowed claims in that class.

Upon confirmation, the business “emerges” from Chapter 11 bankruptcy, no longer a debtor in possession, but a business with a “fresh start”, free of its old debts and subject instead to the terms of the confirmed plan.

Small Business Chapter 11 Bankruptcies

The Bankruptcy Code specifically addresses cases involving bankruptcies of small businesses. Under the Code, a small business debtor is one with total “non-contingent liquidated secured and unsecured debts” of $2,566,050 or less, which either has no creditor committee or for which the creditor committee is not active. Small businesses that qualify for this treatment must follow specific procedures, and submit to close supervision by a “trustee” appointed by the Bankruptcy Court, to demonstrate they have a solid business plan for reorganizing and that they have a realistic shot at confirming a plan of reorganization. In return, they get an exclusive 180-day period to propose that plan of reorganization. (Ordinary Chapter 11 debtors get only 120 days of “exclusivity” before other stakeholders can propose their own plans that are usually far less-favorable to the business than what its existing management proposes.)

Legal Advice for Small Businesses That Need Bankruptcy Protection

Small business owners know when they need help. It is one thing to operate on a shoestring. It is another to realize you cannot possibly support your current debt load and financial obligations to vendors and other “trade creditors” as things stand. Owners who reach that moment of realization should, immediately, seek the advice of an experienced business bankruptcy attorney.

The steps small business owners take pre-bankruptcy can have a significant effect on the outcome of a Chapter 11 case. If you want your business to survive the bankruptcy process, which it absolutely can in most cases with the right planning and approach to a Chapter 11 filing, then get the legal advice you need as soon as possible. Contact an experienced, seasoned business bankruptcy practitioner who can begin plotting a course through the Bankruptcy Code for your business, so that it emerges free of its unsupportable financial burdens and viable for the long-term.

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After Filing for Bankruptcy Can I Buy A House?

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The question can be taken on several levels.

To take it literally: Yes, you can buy a house if you pay all-cash so you don’t need a mortgage. Of course, that applies to very, very few individuals who declare bankruptcy under Chapter 7 (or sometimes Chapter 11) of the U.S Bankruptcy Code.

On another level, the answer is: NO. You cannot be considered for any new loan when you are in the process of declaring bankruptcy. You must wait until your bankruptcy is “discharged,” which means that the court rules that the “debtor” no longer is responsible for certain debts and that creditors no longer can try to collect them. After that, you are legally permitted to seek a mortgage.

Here we address what the question really means for the individual who has declared bankruptcy and been successful in having his or her debts discharged; Will you ever be able to get a mortgage with a bankruptcy on your credit record? A mortgage, after all, is the largest loan most individuals ever get in their lives.

Some bankruptcy realities

Start with the post-bankruptcy realities:

• Your credit rating takes a big hit. No question about it. There isn’t much that can go on your credit record more negative than bankruptcy.
• That bankruptcy will remain on your credit report for 10 years after which it must be erased.
• On a positive note, a successful declaration of bankruptcy usually leaves an individual in a much stronger and more promising financial position. All the years of monthly struggle to meet credit card and other payments, often taking more than half of monthly income, are over.
• How you use this new opportunity for building your financial future will determine, in the end, whether or not you regain your credit—including enough credit to qualify for a home mortgage. One thing is certain. You will have to be patient, exercise some discipline, and adopt some new tools for financial planning.

Some necessary steps

Here are some steps:

Become friends with your credit report. Become familiar with your credit report and stay on top of it. Bankruptcies can introduce some confusion into your credit report. For example, be sure that debts that the court has discharged are not still listed on your credit report. Be sure some confusion of names has not introduced someone else’s credit information in your report (yes, it happens). Be sure that credit information about your former husband or wife is not still on your report because of former joint accounts. You have a right to a credit report for each of the “big three” credit agencies (TransUnion serviced the Central U.S., Experian).  Here is a tip: get your free credit report from one of the agencies every four months to keep much closer track of your credit.

Build up your credit step by step.  How can you do this when you can’t get a credit card or loan? Two frequently recommended initial steps are to 1) get a secured credit card, one tied to your savings account so that if you miss a payment it is taken from your account, and 2) get an installment loan such as a car loan, which is “secured” by the seller’s right to reclaim the car.

Pay your bills on time, every time. Nothing rebuilds your credit so effectively as paying all your bills on time. That new credit card or installment loan can turn into a negative for your credit if you are late with payments. Bankruptcy leaves you in a better position to do this because other debts have been discharged. Now, you have a chance to begin keeping an honest, consistent budget—the bedrock upon which all other financial planning stands. Before you make an expenditure or a commitment to a series of payments, you check your budget to be sure you can handle it. Here’s a tip: Be sure to consider not only immediate or monthly payments but larger annual payments such as taxes. You don’t want them to come along and bust your budget, introducing new financial stress.

Now, you can save again. With your debts discharged, your paycheck is yours, again. An essential step in building toward a major purchase like a home is to save. By far the most effective strategy is to make weekly or monthly savings automatic by one of the many systems for transferred a percentage of your pay to savings. It is less important to make some big deposits than to make them regular. If letting some of your paycheck “go” to savings, rather than things you would like to buy, remind yourself that savings are simply the ability to buy bigger and even more enjoyable things later, like a new home. If you can save enough for a 20 percent down payment on a house, it is very persuasive to a bank. It speaks to your new and consistent financial management. You will definitely want to make those mortgage payments because if default on the mortgage your house is sold by the bank and any equity (such as that created by the down payment) goes first to pay the mortgage.

Shop for both a home and the right mortgage

When the day you can qualify for a mortgage arrives you will deserve a lot of “credit”—and not just financial. It is exciting to shop for a home, but you have learned financial planning and budgeting, so you also will shop for a mortgage. One issue may be the duration of the mortgage. The longer the repayment period (such as 30 years), the smaller the monthly payments but the more you pay, in the end, for your home. A fixed-rate mortgage protects you against rising interest rates; but if interest rates decline, you may have to refinance for the lower rate. The opposite scenario is a variable rate mortgage, with lower payment when interest rates go down—but rising monthly payments when interest rates go up.

Begin the right way

If you reach the day after your bankruptcy when you have rebuilt enough credit to get a mortgage, then the bankruptcy process will have succeeded for you. It all begins with the right outcome of your declaration under Chapter 7 and for that, you want highly experienced lawyers that specialize in individual bankruptcies.

For 35 years, the trusted Philadelphia firm of Cibik & Cataldo, P.C., has provided bankruptcy legal services to enable more than 20,000 personal bankruptcies to be completed in a superior, cost-efficient, and personally respectful way. Thousands of clients in Philadelphia and surrounding areas have benefited from the work of bankruptcy attorneys Michael A. Cibik, Esq. and Michael A. Cataldo, Esq., both certified by the American Bankruptcy Certification Board. That provides you with an objective standard when making your choice of counsel on any financial and bankruptcy matters.

Be sure to check back here regularly for information, insights, and update on how the often-stressful, life-altering, but potentially transformative challenge of your bankruptcy can be handled by a law firm that specializes in individual bankruptcies.

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Famous People Who Have Filed for Bankruptcy

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Making financial commitments and incurring debts is a normal part of life for any ambitious person. These debts and financial obligations can become a burden for even the most successful people. When the burden becomes too heavy, smart people seek relief by filing for bankruptcy protection. Indeed, several famous people ranging from entertainers to politicians, have filed for bankruptcy to get out of tricky financial situations.

Toni Braxton

Toni Braxton was a highly prolific and successful R&B star of the 1990s, but several chart-topping hits and Grammy Awards did not save her from financial difficulties. Apparently, she did not make much from her first music releases and was always in debt. Compulsive spending and career-related financial problems forced her to seek bankruptcy protection in 1998. She continued to record hit songs, but poor returns from the music made her declare bankruptcy again. It was only in 2013 that she cleared her bankruptcy problems.

Kim Basinger

The Oscar-winning actress ran into a legal dispute when she breached a commitment to perform in the movie Boxing Helena. The courts ordered her to pay Main Line Pictures $8.1 million in damages. This financial setback forced her to file for bankruptcy. However, the filing was not enough as some of her assets were liquidated to generate funds. Nevertheless, her acting career continued to thrive with starring roles in films such as The Nice Guys and Fifty Shades Darker. She eventually settled the dispute with the production company out of court.

Donald Trump

While Trump has never declared bankruptcy as an individual, several of his business interests have filed bankruptcy protection. Trump’s hotel and casino investments filed for bankruptcy protection several times between 1990 and 2009. He settled these cases, by relinquishing some percentage of the ownership or surrendering management responsibilities to the creditors. Trump views filing bankruptcies as a strategic business move to protect his investments.

Mark Twain

Mark Twain left an indelible mark on the American literary landscape, but even he was not immune to financial problems. His financial woes resulted from a wrong investment decision related to his publishing business. Twain’s publishing business also endured cash flow problems. He declared personal bankruptcy in 1893 but soon recovered after writing and publishing several bestsellers.

Larry King

Long before Larry King became the king of talk show, he had faced criminal charges that led to financial difficulties. His troubles started with a former business partner accused him of stealing $5,000. Even though the charges were eventually dropped, his career suffered as he was out of work for over four years. This chain of events forced him to declare bankruptcy in 1978 to protect himself from creditors who were claiming more than $300,000. He reignited his career with the Larry King Show on radio before switching to cable TV and hosting Larry King Live, which ran for over 20 years.

50 Cent

Forbes once ranked 50 Cent among the five top-earning hip-hop artists with a net worth of over $150 million. However, poor investment decisions and a big lawsuit that set him back $5 million forced him to file Chapter 11 bankruptcy in 2015. He estimated his debts to be in the range of $10 to $50 million while his assets were around $20 million. 50 Cent managed to settle the debt problems in 2016 by committing to pay $23 million to his creditors over five years.

Henry Ford

Henry Ford might be the most famous industrialist of the 20th century, but it was not always smooth riding for him. Ford’s troubles began when his Detroit Automobile Company failed to make enough car sales to sustain operations. He filed for bankruptcy in 1899. However, he was to bounce back with Ford Motor Company, which became one of the most successful automobile manufacturers globally.

Teresa Giudice

The reality TV star was not just inventing financial problems for TV as seemed be in financial trouble in real life. She first declared bankruptcy in 2009, together with her husband. This was only the beginning of her legal problems. The creditors claimed that they had not declared all their assets leading to a charge of bankruptcy fraud. The couple was convicted of fraud and served time. Giudice cleared her bankruptcy fraud problems in 2016 but is still paying her back taxes.

Marvin Gaye

The Prince of Soul was electric on stage, but even his musical brilliance could not save him from financial troubles. His financial problems emanated from unpaid alimony costs amounting to $600,000. These debts coupled with low performance income forced him to seek bankruptcy protection in 1976. However, his award-winning hit, Sexual Healing, topped the billboard and went a long way into solving his financial problems.

Meat Loaf

Meat Loaf’s financial troubles resulted from disputes with producer and business partner Jim Steinman. The pair had so many disagreements that at one time, Meat Loaf was the subject of 45 lawsuits claiming over $80 million in damages. He decided to file Chapter 11 bankruptcy protection to stop the record label from making frivolous suits. They eventually resolved the problem in the early 1990s. Meat Loaf later relaunched his music career with a highly successful album.

Isaac Hayes

Hayes’ had trouble with a bank that advanced loans to his production house Stax Records. The bank claimed over $6 million, forcing him to seek bankruptcy protection in 1976. However, he still lost personal property and rights to all future performances and royalties. Hayes later reinvented himself by being the voice of a character in South Park, which was highly successful on Comedy Central. The show has been on TV since 1997 and has been nominated for over 15 Emmy Awards.

Need a bankruptcy lawyer?

Anyone can experience financial troubles that need bankruptcy protection. It helps to work with a reliable partner who is well versed in bankruptcy law. Cibik & Cataldo, P.C. are bankruptcy lawyers with over 40 years’ experience of serving Philadelphia clients. Our bankruptcy attorneys counsel clients on legal protections for different types of personal and business financial problems.

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