Colin W. Wied no longer accepts engagements to handle business bankruptcy cases. Nevertheless, he is available to consult with law firms who may benefit from his expertise and experience in business bankruptcy practice and procedure. For ten years, Mr. Wied was a business bankruptcy specialist, certified by the American Board of Certification and The State Bar of California. He plans regularly to update his book, Chapter 11 From Start to Finish, A Comprehensive Guide to Handling Business Bankruptcy Cases.
Mr. Wied maintains his Chapter 11 bankruptcy competency by continued study, teaching and writing.
Mr. Wied is available to consult in business bankruptcy cases throughout the country. Engagements may be arranged by contacting him directly at (619) 338-4030 or cww@cwwied.com
Six Bankruptcy Myths Debunked
Bankruptcy law and practice are a bit arcane, so it is not surprising that misconceptions abound. While Chapter 11 practice is somewhat complicated, it is that way to protect the interests of both debtors and creditors. Arcane and complicated – yes; mysterious and scary – no.
Here are 6 myths about business bankruptcy that need to be set straight:
1. Filing Chapter 11 will ruin my business’s credit rating for 10 years!
If you or your business is contemplating filing a Chapter 11 case, your credit rating may not be all that great. True, filing a bankruptcy petition will appear on your personal credit rating for 10 years. That does not mean you won’t have access to credit for the entire 10 years. In any event, cleaning up your financial mess by utilizing a Chapter 11 filing can only improve your business or personal credit rating.
2. Chapter 11 is for businesses, not individuals!
Not true. In fact, Chapter 11 was amended in 2005 to add provisions regarding individual persons that parallel those in Chapter 13. Many middle- income persons are ineligible to file Chapter 13 because the amounts of their secured or unsecured debt are too high, or they do not hold jobs with regular income. Chapter 11 is available to these individuals to enable them to retain their homes and reorganize their financial obligations.
3. Suppliers will stop doing business with me if my company files for Chapter 11!
Highly unlikely. Suppliers of goods and services badly need customers, especially during this time of economic recession. Suppliers will continue to do business with you if you have treated them honestly, fairly and candidly. Initially, they may insist on COD terms. Once a Chapter 11 case is filed, any obligations incurred later by the debtor are administrative priority claims, which get paid first. Credit managers know this and, if the debtor’s monthly operating reports show the debtor is operating profitably, they will probably agree to modest credit terms. It is in the suppliers’ interests to do what they can to preserve a customer, even if that means waiting a while to be paid the debts incurred prior to the filing of the Chapter 11 petition.
4. It’s better to cut deals with some of my creditors and talk the lender into entering into a forbearance agreement, than to file Chapter 11!
Dealing selectively with the noisiest creditors is probably the biggest mistake you could make, for a couple of big reasons. First, it is not wise to use up operating cash reserves to placate a few creditors. Operating cash reserves should be used only to pay current operating expenses. Using operating cash like water to put out the hottest creditor fires leaves your company without cash to operate. Second, lenders expect to improve their position when they offer a forbearance agreement. Typically, you will be required, as a condition to forbearance, to make a big pay down of the loan principal; pledge (additional) security; sign guarantees, usually secured by your home and other property; waive lender liability claims; and even waive your company’s right to file Chapter 11. If your company is commercially insolvent (unable generally to pay bills as they come due), you need breathing room to do two things: first, reorganize the business internally so it once again makes more money than it spends; and two, reorganize externally so pre-Chapter 11 debt can be dealt with without destroying the company’s viability.
5. If I file Chapter 11, I will lose control of my business!
In the old days, well before October 1, 1979 when the Bankruptcy Code was given an overhaul from top to bottom, trustees or receivers were commonly appointed to take over the operation of businesses that filed either Chapter X or XI petitions. Under the new Code, Chapter X no longer exists and in Chapter 11 (no longer called Chapter XI) cases the business debtor is allowed to remain in possession of and operate its business.
6. Chapter 11 is way too expensive!
Yes, the Chapter 11 process is expensive, although there many ways to minimize costs. But is it too expensive? The only way to answer that question is to do a cost-benefit analysis. Ask – what is it worth to avoid a collapse and liquidation of the business? The best way to keep the costs down is to commit yourself and your attorney to working collaboratively with creditors. Litigating every issue in the case is really expensive. Negotiating and, where necessary, mediating disputes is not only less costly, it is satisfying.
