Bankruptcy Asset Protection

In a sagging economy, filing Chapter 11 bankruptcy protection may loom large on the horizon for many of the nation's failing enterprises. When a business incurs more debt than can be handled and the bank threatens to call in the note, it's time to consider drastic debt relief measures, and bankruptcy might be one of them. Due to an economy on the brink of recession, business owners are feeling the effects of consumers' tightened purse strings. Attorneys are filing a record number of bankruptcy asset protection cases, as large and small entrepreneurs bite the bullet to try to bail out of debt. Many companies opt to shut down, but that's not always the best solution. A corporation may have invested huge sums of capital in inventory, labor, and overhead; not to mention years of developing a strong customer base. Investors, shareholders, employees, and suppliers all have to be paid; and going out of business may not be an option, even if the business is in the red.

Companies fail for a myriad of reasons, many of which can be traced to poor fiscal management or an unruly economy. The lack of sufficient financial backing and cash reserves can leave businesses unprepared to weather a recession or a season of poor consumer spending. Conversely, in a burgeoning economy, smaller businesses may grow rapidly, but lack sufficient capital to stock enough inventory to keep up with demand. Crucial to building a successful enterprise is formulating a sound business plan, which forecasts projections for growth, current needs, and contingencies for slow economic times. Scripture teach us to count up the costs before attempting to build: "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish." (Luke 14:28-30). Many fledgling operations close prematurely because of a failure to count up the cost of entreprenuership. High employee turnover, lack of management skills, or a high debt-to-profit ratio can all impede productivity, siphon off profits, and impact bottom lines. Whatever the reason for financial failure, struggling companies seeking to remain in business may want to consider filing Chapter 11 bankruptcy protection.

Chapter 11 affords businesses and corporations the opportunity to restructure management of the company and reconcile outstanding debt through bankruptcy asset protection. Once a petition is filed with the court; the judge issues a "stay," which immediately stops all debt collection proceedings and the seizure of business assets. The U.S. Trustee will set up a committee to represent and act on the behalf of all of the businesses' creditors. This committee usually consists of creditors holding the top seven largest accounts of unsecured debt. Unsecured debt is outstanding monies owed for which the creditor has no collateral.

Thirty days after filing Chapter 11 bankruptcy protection, the trustee will call a 341 hearing with the debtor, the bankruptcy attorney, and creditors' legal representatives in attendance. Business debtors will have an opportunity to testify before the judge regarding current indebtedness and management practices, along with other fiscal concerns. During the hearing, the debtor's attorney presents the debtor's plan to reorganize the business, make it more profitable, and settle creditor claims. A corporation debtor's reorganization plan must not only satisfy creditors, but it must also meet the approval of shareholders who have a financial interest or ownership in the corporation. Sole proprietorships or business partnerships' reorganization plans must also meet creditor approval. In addition to changing management, a sound bankruptcy asset protection plan may include dismissing non-productive employees, adjusting product and service lines, and developing a more successful strategy to remedy the current enterprise's shortcomings.

When all parties agree to the restructure plan, the court dismisses most outstanding debts, with the exception of those which are not dischargeable by law: IRS taxes, including penalties and interest; Department of Labor employer tax payments: child support and alimony payments; and employee paychecks and benefits payable 90 days prior to filing. Chapter 11 bankruptcy protection essentially creates a new enterprise, usually under the management of the previous owner's creditors. The former owner relinquishes the right to manage the business without the oversight of creditor "watch dogs." Shareholders and creditors who have a substantial financial investment in the failing business, thus become more involved in the day-to-day management of the newer, and hopefully, more improved operation. New management, enforced through bankruptcy asset protection, increases the chances that the business will remain open and that most monetary obligations will be met.

Filing Chapter 11 bankruptcy protection may not be advisable for owners who want to maintain control of their enterprises. Alternatives include selling the business to pay off creditors; laying off employees to reduce labor costs; negotiating with creditors, vendors, and financial institutions to work out more manageable repayment plans; and business debt consolidation. Filing Chapter 7 liquidation to turn inventory into cash to pay creditors may also be a possibility. Some near-bankrupt business owners may attempt to save a failing company by going into partnership with individuals who are financially solvent. Additional funding sources may provide much needed capital to keep the company afloat until the economy stabilizes. In the long run, alternative methods may be insufficient to avoid seeking business asset protection through bankruptcy court. Financially troubled entrepreneurs should seek the advice of lawyers and accountants to determine the best solution.

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