Financial and
Bankruptcy Law
Individual Bankruptcy
Bankruptcy is enshrined in our constitution and valued as a way to “give an honest Debtor a fresh start.” Its purpose is to help an individual debtor get back on their feet while paying the debtor’s creditors as fairly and evenly as possible. The procedures of the Bankruptcy Code provide an orderly process for liquidating and distributing some of the Debtor’s assets, while protecting others.
The process of determining whether an individual qualifies for bankruptcy, and if so under which section of the Bankruptcy Code, is complex. The attorneys at JRFPC can provide effective and efficient counsel to help you determine whether bankruptcy is the right step for you to take when you are overwhelmed with bills you cannot pay. We will guide you through selecting the proper chapter of bankruptcy for your circumstances, and how to position yourself to benefit the most from a fresh start.
Individual Bankruptcy Law.
Individual bankruptcy allows a Debtor to be released from paying certain debts. These debts are “discharged” by the bankruptcy. Not all debts are eligible to be discharged. For example, debts due to the Debtor’s fraud are not dischargeable, and under current law student loans are not dischargeable. Child support arrearages are also not dischargeable.
Individual bankruptcy also allows a Debtor to preserve certain assets, such as retirement accounts and the Debtor’s home. Whether these or other assets can be preserved through a bankruptcy depends on the individual Debtor’s location and circumstances. The attorneys at JRFPC will help you understand how much of your estate you can save, and why.
Here are some frequently asked questions about individual bankruptcy.
1. What Type Of Bankruptcy Would I Qualify For?
The Bankruptcy Code provides two main paths for personal bankruptcy: Chapter 7 and Chapter 13. By far, most individual bankruptcies in Michigan are Chapter 7 Bankruptcies.[1]
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Chapter 7 Bankruptcy is designed for those Debtors who are genuinely unable to pay their bills. In the simplest terms, to qualify for Chapter 7 Bankruptcy, a Debtor’s earnings must be less than the median income for a family of six in the Debtor’s state. There are many nuances to evaluating a Debtor’s income and solvency, however, and even Debtors with a higher income may qualify for bankruptcy. The Bankruptcy Code provides for a means test to determine whether the potential Debtor genuinely needs, and qualifies for, Chapter 7 relief.
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Chapter 13 bankruptcy is also known as the “wage earner’s bankruptcy.” The Chapter 13 Debtor must have a stable source of income and substantial unsecured debts, such as personal loans, credit cards, and medical bills. The Bankruptcy Code includes minimum and maximum limits for different types of debt. In some instances, a Debtor who does not qualify for a Chapter 7 Bankruptcy is a good candidate for a Chapter 13 Bankruptcy instead.
One of the key differences between the two types of bankruptcy is that a Chapter 7 Bankruptcy is a much faster process. Another key difference is that a Chapter 13 Bankruptcy includes a 3-5 year repayment plan, and debts are discharged only to the extent they are not repaid under the plan and only after the plan has been completed by the Debtor.
2. Do All Your Debts Qualify For Bankruptcy?
The answer to this question depends on the type of debts the Debtor has. Many, if not most, individual bankruptcies are filed because the Debtor cannot pay medical bills.
As mentioned above, not all debts can be eliminated in bankruptcy. The following debts cannot be discharged under individual bankruptcy laws:
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Child support debts
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Obligations arising from Alimony or Spousal Support
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Debts owed to government agencies
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Student loans
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Income taxes
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Court penalties and fines
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Debts arising from the Debtor’s fraud, such as judgments against the Debtor
The debts covered under Chapter 7 Bankruptcy include personal loans, medical bills, credit card debts, obligations from contracts and leases, and lawsuit judgments that are not based on fraud.
The debts covered under Chapter 13 Bankruptcy include all the Chapter 7 Bankruptcy debts, as well as divorce debts (except domestic support obligations) and certain other debts.
3. Do I Qualify For Individual Bankruptcy
A Debtor qualifies to file for bankruptcy if, generally speaking, the Debtor cannot pay his or her debts. The question of whether someone qualifies for bankruptcy, however, can be fairly complex because of the required means testing, and because the nature of debts determines whether they can be discharged. A person hoping to file for bankruptcy should consult with an experienced bankruptcy attorney to determine whether they qualify.
Bankruptcy allows a Debtor to receive a fresh start. There are, however, some serious downsides to filing for bankruptcy, including:
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The Debtor’s future ability to borrow money is significantly affected. Bankruptcy records can remain on your credit report for up to 10 years.
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The Debtor might not be able to avoid foreclosure.
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Bankruptcy may lead to a deduction of money from any form of monetary compensation, including salary and tax refunds.
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Bankruptcy also sometimes carries a societal stigma. Some people view bankruptcy as a personal failure rather than simply a product of circumstances that are often outside the Debtor’s control.
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4. The Adverse Effects Of Declaring Individual Bankruptcy
Bankruptcy allows a Debtor to receive a fresh start. There are, however, some serious downsides to filing for bankruptcy, including:
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The Debtor’s future ability to borrow money is significantly affected. Bankruptcy records can remain on your credit report for up to 10 years.
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The Debtor might not be able to avoid foreclosure.
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Bankruptcy may lead to a deduction of money from any form of monetary compensation, including salary and tax refunds.
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Bankruptcy also sometimes carries a societal stigma. Some people view bankruptcy as a personal failure rather than simply a product of circumstances that are often outside the Debtor’s control.
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5. What Is The Appropriate Time To Declare For Bankruptcy?
The best time to file for individual bankruptcy
depends on the Debtor and the Debtor’s
circumstances. The following situations,
however, often indicate that it is time to
file for bankruptcy:
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It would take more than five years for the
Debtor to repay current debts
(not including student loans).
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If huge debts comprising of credit card debts,
mortgage debts, student loans have ruined the
Debtor’s financial standing entirely, and with no
possibility of the situation changing anytime soon.
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If the Debtor has unsuccessfully gone
through a debt settlement or debt management
program with creditors.
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If the Debtor has unsuccessfully explored
other debt relief measures.
As mentioned above, determining whether someone qualifies for bankruptcy requires careful analysis and should generally be done by an experienced bankruptcy attorney even for individual debtors with few assets and debts. Some reasons an individual might not qualify for bankruptcy include:
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Failing the means test. This means that an individual’s income is too as compared to that person’s expenses. Alternatively, the individual could own too many valuable assets that could be used to offset debts.
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The debts are too small.
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The Debtor can’t afford to pay the filing costs or attorney fees. It is estimated that filing for individual bankruptcy costs between $1,500 and $4,000. This covers both the attorney and court filing fees. A Chapter 7 Bankruptcy usually costs around $1,500, but a Chapter 13 Bankruptcy is more complicated and time-consuming, and usually costs upwards of $4,000.
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6. What Can Cause You To Declare Individual Bankruptcy?
There are several reasons that can force someone to seek debt relief. The leading cause of individual bankruptcy is medical debt, but other causes include unexpected job loss and other consumer debts such as credit card debt. Other conditions that can force someone to declare bankruptcy include the following:
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Lawsuits by creditors for late payments.
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A home in danger of foreclosure.
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Divorce.
7. What Can Cause You To Be Disqualified From Individual Bankruptcy?
8. What Are The Steps In Successfully Filing For Individual Bankruptcy?
A successful bankruptcy involves careful planning and execution, working with an experienced bankruptcy attorney. There are some steps an individual can and should take, however, before consulting with a professional. In general, a bankruptcy requires the Debtor to do the following:
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Gather all financial records. These include income documents such as W-2s and tax returns, expenses, assets, and debts. Records also include all bank and credit card statements. These documents provide the Court and a bankruptcy attorney with the factual picture of the Debtor’s financial standing.
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Visit a reputable financial counselor and obtain a certificate of completion. This step is an absolute requirement for a Chapter 7 Bankruptcy and it can be a valuable step for anyone in financial straits. Be wary, though. This counseling should be extremely cheap; if you are being asked to pay large amounts for financial counseling you may be the victim of a scam or a bad business practice. There are options to complete this counseling online within a few hours.
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File a petition for bankruptcy. This step should be done by an attorney if at all possible. Navigating the bankruptcy system, including understanding the Bankruptcy Code as it applies to your case and understanding how the Bankruptcy Court requires you to submit information or respond to requests, can be difficult and confusing. Bankruptcy requires an abundance of forms and many steps with the Court. A Debtor who fails to follow the right procedure risks having their case rejected.
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The Bankruptcy file is assigned to a court trustee. The trustee is mandated to arrange a meeting with your creditors, called a “341 Meeting.” You are required to attend the meeting in person. Creditors will use this opportunity to ask for your financial information and conduct their own analysis of whether you qualify for debt relief.
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The Court determines whether you qualify for Chapter 7 protection or not. If the courts deny your petition, you can sometimes still file for Chapter 13 of bankruptcy.
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The trustee will then decide on your nonexempt property. Some property is exempt from bankruptcy, meaning a Debtor cannot be forced to liquidate that property to pay debts. The remaining property, however, is nonexempt and will be liquidated. A competent bankruptcy attorney will negotiate with the trustee on the Debtor’s behalf to keep certain property qualified as exempt, or to make deals with the trustee or creditors to trade certain exempt property for nonexempt property. The goal of the bankruptcy process is to provide for an orderly distribution of the Debtor’s assets to creditors, and that can be done in various ways if the Debtor’s attorney is creative and thoughtful and understands how to work with creditors.
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Deal with and settle secured debts. Secured debts are the collateralized debts, such as a car loan. It means that the creditor has the right to take the collateral (such as the car) in case you fail to pay the debt as agreed. A Debtor can reclaim property that is collateral by paying off the debt in full or reaffirm the debt. Reaffirming the debts means the Debtor agrees to continue paying it once the bankruptcy is over, even if that debt could otherwise be discharged. Again, a common example of this type of debt is a car loan, where it would often be more cost-effective for the Debtor to keep the car, and for the creditor to allow the Debtor to keep it and continue making payments.
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After filing, the Debtor is required by law to take a financial management course.
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The Debtor will receive a “discharge” three to six months after filing for bankruptcy. The discharge ends the bankruptcy case and allows the Debtor to go forward with as clean a slate as possible.
Bankruptcy is complicated, for individuals as well as for businesses. It can be a tremendously worthwhile effort, or it can be a costly waste of time, depending on the Debtor’s individual circumstances. At JRFPC we strongly believe that we can provide the best value to an individual debtor, whether that value lies in counseling our clients that bankruptcy will not resolve their financial woes, or guiding them through bankruptcy to a brighter financial future.
[1] See statistics for Michigan at the American Bankruptcy Institute’s website, https://www.abi.org/newsroom/bankruptcy-statistics.
Individual Debt Restructuring
Filing for bankruptcy is not always the right path to eliminate financial distress. Whether because a potential Debtor does not meet the requirements to file for bankruptcy, or is adverse to filing for bankruptcy because of some of the negative repercussions of a bankruptcy, or some other reason, sometimes a person deep in debt will choose restructuring over bankruptcy.
Just as for a business, restructuring for an individual involves talking to creditors and working out new payment terms. Sometimes it involves refinancing altogether; sometimes it merely involves arranging a payment schedule.
If you’re experiencing prolonged financial distress, attorneys at JRFPC may advise against filing for bankruptcy and instead suggest debt restructuring. We believe that every individual’s financial situation is unique, and so we will evaluate your situation to determine if debt restructuring is the best option for you.
What Is Individual Debt Restructuring?
Individual debt restructuring is an out-of-court debt relief option that helps individuals pay off their existing loans or get rid of credit card debt without affecting their credit rating. As the name suggests, debt restructuring involves sitting down with the creditor and restructuring the loan debt in such a way that it’s easier and convenient for you to repay.
This may involve reducing the number of monthly payments, reducing the principal amount or reducing the interest amount to be paid. In many cases, the creditor ends up receiving a lower amount after full loan repayment.
Restructuring an individual’s debts can present pitfalls for the unwary or those who do not seek legal counsel. The wrong agreement can actually increase a borrower’s overall debt total even if it decreases monthly payments, for example.
A debt restructuring attorney can represent a borrower or a creditor.
When a debt restructuring attorney is representing a borrower, the attorney’s main aim is to sit down with the lender to negotiate debt terms that align with the borrower’s financial capability. Although finding a solution that fits both parties is a challenging task, especially in the present day’s economic environment, our debt restructuring attorneys think harder to find solutions that work for both parties. Ideally, the attorneys try to find solutions that prevent anyone from going bankrupt and work to reduce time and expense for both parties.
When a debt restructuring attorney is representing a creditor, the attorney’s main aim is to find solutions that will produce the highest debt recovery. They will evaluate the implications of possible bankruptcy and look at borrowers’ past financial activities in order to come up with the best solution for creditors while considering both long-term and short-term repercussions.
Types Of Individual Debt Restructuring
There are two types of debt restructuring:
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General debt restructuring: With general debt restructuring, the creditor or lender doesn’t incur any losses in the new debt repayment agreement. They may choose to reduce the interest rate or extend the debt repayment period to allow the borrower to recover from temporary financial distress and repay the debt at a later period.
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Troubled debt restructuring: With troubled debt restructuring, the creditor or lender incurs losses in the new debt repayment agreement. The negotiations may result in a reduction in the total interest or a reduction in the value of the collateral.
Advantages Of Debt Restructuring
Our debt restructuring attorneys can help you avoid bankruptcy cost-effectively by helping you negotiate a favorable debt repayment plan with your lender.
When you’re facing bankruptcy, the lender is more than willing to negotiate a debt restructuring instead of going through the trouble of repossessing your assets and selling them. In fact, the lender may end up with less money than the original debt. Thus, it is often in a lender’s best interest to allow an extension of the debt repayment period rather than to forgive part of the loan or attempt to repossess assets.
Debt restructuring seldom involves taking out new loans, unless it is done to consolidate other loans that carry less favorable terms. This helps protect you from accumulating more debt. It also cushions your credit score.
While you can negotiate your own debt restructuring, it’s far more beneficial to hire an attorney to do it for you.
A debt restructuring attorney has a wide experience and expertise in debt restructuring work. At JRFPC, we understand a creditor’s goals and how to work with them to achieve an outcome that works for them while keeping our clients out of bankruptcy. Because of our extensive background in bankruptcy, creditors know that we are trustworthy when we explain to them that if they do not restructure a debt, they risk the entire debt being discharged in bankruptcy instead. Ultimately, a successful debt restructuring is the best outcome for both the creditor and the borrower.
Debt restructuring negotiation is a time-consuming and energy-draining process for an individual. For a debt restructuring attorney, the process is still time-consuming but less so than for an individual because we understand how to cut through a lot of discussions to get to the point. We also often work with the same creditors repeatedly, which allows us to build relationships with them that facilitate smooth and effective debt restructuring. In general, an attorney with experience can save an individual substantial time and money.
In addition, if we assist you in restructuring a debt with a creditor, we will also defend you against that creditor if they breach the agreement. For example, if a creditor agrees to give you 3 years to pay a debt and then attempts to garnish your wages, we can and will advise you on how to deal with the creditor, or we will take action on your behalf.
A borrower negotiating on their own behalf runs significant risks. Such a borrower can be tempted to give in to unreasonable demands from a creditor, or fail to negotiate for the best possible deal. Having an experienced and knowledgeable partner in JRFPC will mitigate and reduce these risks.
Business Reorganization & Restructuring
Reorganization and restructuring a business can be either an alternative to bankruptcy or done in conjunction with a bankruptcy for a going concern. A “going concern” is a business that is or would be able to function even though it might have serious liquidity problems. For example, a grocery store with plenty of customers is a going concern, but if the store’s debt load prevents it from getting necessary credit it might need a restructuring or reorganization. Done at the proper time, a reorganization and restructuring can extend the life of a company facing imminent bankruptcy, or even forestall a bankruptcy entirely. Alternatively, a company that has already declared bankruptcy can use the breathing space provided by the automatic stay to restructure the business and its debts so as to emerge from bankruptcy as a healthy going concern.
Reorganization and restructuring typically refers to a company’s debts—but it can also refer to a company’s equity structure, labor force, and every other aspect of the business. In a reorganization, everything about a business is examined to determine whether, and how, it should be a part of the new business that emerges from the bankruptcy. Debt in particular can be reorganized or restructured through, for example, extending credit lines or negotiating with suppliers to continue providing materials to keep the organization afloat. Restructuring can also include reducing or increasing the number of branches, reconstituting the board, or even selling off shares to the public or a significant shareholder.
While restructuring can be done outside of bankruptcy, the Bankruptcy Code gives the Debtor additional tools to use in restructuring that are unavailable outside of bankruptcy. At JRFPC, our knowledge of the benefits and drawbacks of these tools help us guide our clients through the choice to file for bankruptcy or pursue reorganization outside of bankruptcy.
Steps Of Reorganizations
Many states allow for companies to reorganize their affairs rather than face liquidation. A reorganization commonly involves getting new terms on loans and staggering payments. This process is also supported by the Bankruptcy Code, which sees liquidation as the last step in a troubled organization.
Most of the reorganization steps start internally. These steps include a thorough financial and personnel review, a review of all contracts, and other analysis to fully understand the state of the company. This can and should be done with a bankruptcy attorney or reorganization specialist. Additional consultants, such as efficiency experts, can also sometimes be helpful at this juncture.
Once a legal process commences, and the bankruptcy court rules that there is a need for reorganization, the Debtor will put forward a plan to be approved. Creditors will have the opportunity to object to the plan. Eventually, however, the plan allows the Debtor to pay creditors in an orderly fashion and simultaneously reorganize itself.
Once a company secures new credit repayment schedules, the company can then move to seal the holes that led to the problem or challenges it is facing. This can include restructuring the organization, changing the management of the firm, or reducing the workforce.
Restructuring debt is by no means the only facet of a reorganization, however. Any plan for reorganization would need to be approved by the company’s board of directors and other stakeholders. That can be a delicate process as different stakeholders may have different—and sometimes competing—goals. Another extremely important aspect of reorganization is examining the tax repercussions of various strategies. All in all, the steps to preparing and implementing a reorganization can be complex and require skilled attorneys and other professionals to implement.
Things To Look Out For Before You Reorganize Your Company
Before a company enters reorganization, there are vital issues that our attorneys look out for to ensure the company does not revert to a troubled status. A bankruptcy court and Creditor’s Committee in a Chapter 11 Bankruptcy will also weigh in on some of these issues.
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Does the organization have the capacity to remain afloat? In other words, are the organization’s difficulties due to problems within the company itself, such as a how debt is organized or an overstaffed work force, or are they due to industry changes? If the collapse is a result of a sweeping change in the fortunes of an industry, or massive national or global changes, a reorganization might not stem the losses and would eventually be futile.
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Is the business model being used the main reason the business is failing? The reorganization team can look at how the company has been conducting business. If most of the sales were coming from one area of focus, they might recommend casting the net wider. This is part of the restructuring plan that can lead the company into new areas and adopting a new business model.
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Would the company shareholders achieve more if the company was liquidated rather than extending its life? Rather than waiting until the value of the company is too low, our attorneys might float an idea of immediate liquidation to shield the owners and shareholders from losing the value of their work. This calculation takes into account the amount the company owes and how much workers would be paid.
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Is there an option for merger and acquisition? Some business organizations move into mergers to expand their reach and change how they attack the market.
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When To Restructure A Business Organization
There are specific reasons that lead a company to restructure. Most of these reasons are based on the need to reduce the costs of running a business as well as ensuring the company is making business sense in the field.
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Reduce operational costs: This includes reducing the number of employees, the cost of running different outlets, cutting non-profitable operations, and focusing on the core business.
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Improve its competitive advantage: This usually involves shifting the business focus to the core business of the organization.
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Prepare for a merger with another company: When a new company comes on board, there are casualties, mainly managers and staff. This means a company that merges with another has to reduce duplication of roles and jobs overlay. In most cases, mergers lead to loss of jobs.
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Weed out some dead wood, including inside the board: Some organizations are run by boards that aren’t in tune with the mission of the organization. Restructuring helps introduce some new energy and new ideas in running the company. It also helps in reducing the influence of some board members who have not had a significant or positive impact on the team.
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Introduce new technologies: When there is a need to introduce new technologies that will help run the company, an organization is forced to lay off some staff or even add new business models that will push the organization to greater productivity and profits.
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Introduce a new strategic partner: This can be different from a merger, or it can be in the form of a merger. This is where a company gets engaged with a new partner in doing business that will help it get into new areas of focus. When this happens, the company needs to restructure its goals and mission to be in tandem with the new partner.
Corporate Bankruptcy – Reorganization Or Liquidation
A corporate bankruptcy occurs when a corporation is no longer solvent—that is, it cannot meet its day-to-day obligations. Sometimes a corporation becomes insolvent because of a liquidity crises but the underlying business remains strong. Such a corporation is likely to seek the protection of a Chapter 11 Bankruptcy as a going concern. Other times, a corporation is forced into bankruptcy because its business model has failed and even restructuring its debt will not allow it to emerge as a going concern. In that case, the corporation will enter either a Chapter 7 or a Chapter 11 Bankruptcy with the purpose of liquidating its assets and paying creditors in an orderly fashion.
In either case, whether a reorganization or a liquidation is necessary, the attorneys at JRFPC are experienced practitioners of bankruptcy law. We are ready and willing to help you restructure your business, evaluate the underlying economics of your business model, and walk you through the decision-making process as to whether a liquidation or reorganization is the right next step for your corporation.
Smaller companies and sole proprietorship have an additional option to often find themselves with more options in filing for bankruptcy which includes the same chapters mentioned above, but can also seek Chapter 13. This chapter is reserved for consumers and sole proprietorship that stipulate to a repayment formula that helps the company get back to profitability.
Types Of Bankruptcy
A Chapter 7 Bankruptcy for a corporation is a liquidation. At the end of the bankruptcy case, the corporation will be unwound and all the corporation’s assets will be distributed to creditors. The corporation will cease all operations. In a Chapter 7 Bankruptcy, the Bankruptcy Court will appoint an interim manager who is responsible for managing the company’s assets and works on a formula to dissolve the company and distribute the proceeds to debtors. It is normally seen as the last step in folding a company.
Alternatively, a Chapter 11 or, more rarely, a Chapter 13 Bankruptcy will allow a corporation to restructure its obligations and take other measures that will allow it to pay creditors in an orderly fashion and emerge from bankruptcy as a going concern. The Bankruptcy Court appoints a trustee who runs the business on an interim basis until the company is profitable again and can to pay off its creditors.
Because a reorganization plan affects how and when creditors will be paid by a going concern, the creditors are allowed to vote on and approve a reorganization plan. The creditors form a committee that can have considerable sway over how the reorganization plan looks, and over the progress of adversary proceedings.
Factors That Lead To Corporate Bankruptcy
Bankruptcy is not always a result of bad management. There are various ways in which a company may fall into bankruptcy even if it has done everything well. These could include prevailing market conditions, financing, natural disasters and other causes beyond anyone’s control. Some factors that can lead to bankruptcy include:
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Prevailing market conditions – Sometimes a company finds itself under intense competition as well as increasing hard economic times. Market conditions affect the overall income as well as the costs of running a business. Difficult market conditions can lead to a company failing to pay its debts in time and becoming insolvent. Sometimes market conditions are completely beyond the Debtor’s control; sometimes, however, market conditions are foreseeable and are incorporated into a prudent Debtor’s business plans.
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Expensive financing options – a company might enter into a situation whereby it needs financing desperately. Seeking short-term financing might result in the company choosing expensive or sometimes unsuitable repayment schedules. Sometimes this issue can be resolved outside of Bankruptcy Court via negotiation or debt restructuring.
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Poor decision making – CEOs and executives can make decisions that lead a company into insolvency. Bad management is commonly at least a partial cause of a corporation entering bankruptcy, especially in conjunction with adverse market conditions.
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Lack of institutional memory – Companies with high turnover, especially at management level, suffer from inefficiency and a lack of institutional memory. This factor can affect a company in some surprising ways, including but not limited to failed relationships with important creditors. Having institutional memory can help a corporation deal with long-time creditors and vendors to reach necessary payment deals and avoid bankruptcy.
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Natural catastrophes – When a hurricane or an earthquake hits an area, or a pandemic sweeps across the economic landscape, there are companies which might never recover. Bankruptcy may be an inevitable conclusion to such events and help the corporation and its employees to wind down the business in an orderly way even after chaos has caused it to become insolvent. Bankruptcy can also sometimes help a company come out of a natural disaster as a going concern if the underlying economics of the business are profitable outside the effects of the natural disaster.
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Tax and fraud-related issues – Sometimes an organization is forced to shut down operations when it is unable to pay its taxes or when company executives being involved in fraud. A bankruptcy will deal with the fraud claims in an orderly fashion as well as claims from all creditors.
Managing Business During Bankruptcy
Running a corporate entity during the bankruptcy period can be a challenge. All eyes are on the company to avoid making other poor decisions, and the management’s decisions are routinely scrutinized by the Court and the Creditor’s Committee. This can also be a tricky time to get new credit, new staff, or venture into new areas of operation.
Nevertheless, a good management team, in conjunction with outside experts including bankruptcy counsel, can use the time in bankruptcy, and the protections the Bankruptcy Code offers to a Debtor-in-Possession, to rebuild the business and emerge from bankruptcy stronger than ever. The attorneys at JRFPC are experienced in the ins and outs of operating as a Debtor-in-Possession, negotiating with individual creditors and the Creditor’s Committee, and helping a Debtor emerge from bankruptcy well-positioned to take advantage of an improved economic condition.
Chapter 11 – Business Reorganization & Restructuring
Reorganization does not mean the same thing for every business. In general, reorganization can be as simple as looking at how a business is run and introducing changes. It can also mean finding ways to extend the life of a company possibly facing imminent bankruptcy, or that has already been declared bankrupt. This kind of reorganization involves extending credit lines or negotiating with suppliers to continue providing materials to keep the organization afloat. Restructuring can also include reducing or increasing the number of branches, reconstituting the board, or even selling off shares to the public or a significant shareholder.
Finally, restructuring can—and usually should—also involve reshaping the goals and missions of the business to either focus on key areas or expand to new areas that were not part of the main core business but that complement it and lead to new profit opportunities.
In short, restructuring looks different, and means something different, for each potential Debtor. What remains key in any restructuring is to take advantage of good legal and business advise. The attorneys at JRFPC stand ready to be your partner in the process of reorganization, working by your side to streamline your organization and its finances, and to work with business experts to determine the best path forward for your business.
Steps Of Reorganizations
Most of the reorganization steps start internally, and if a business is big enough to have an internal legal advisor, they will initiate this step together with the management. If there is no internal legal counsel, an external legal firm with bankruptcy experience should be hired to advise the business in this process.
Once a legal process commences, and the Bankruptcy Court rules that there is a need for reorganization, the Debtor will implement a reorganization Plan. Through the Plan, the company begins to pay its creditors and attempts to change how it collects and uses its finances. In a Chapter 11 bankruptcy, there may be a Creditor’s Committee that will weigh in on these decisions as well.
Steps Of Reorganizations
Before a company reorganizes itself, there are vital issues that our attorneys look out for to ensure the company can and should emerge as a going concern and not slide back into insolvency. A proper analysis of the organization’s economics and business model includes looking at numerous aspects of the business to explore ways and means of introducing changes, and whether such changes would be sufficient to change the company’s outcome. A competent legal team will manage this process and, if bankruptcy is necessary, work with the Bankruptcy Court and Creditors to ensure an optimal result.
The following questions are key to successful reorganizations:
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Does the organization have the capacity to remain afloat? One way to think about this question is to suppose that the company were debt-free and had no other obligations. Would it be a viable business if not for its debt and obligations? If the entire industry has failed because of changing technology, for example, the business might not be capable of continuing even in the most favorable conditions. In other words, a company that makes typewriters when the world has switched from typewriters to computers probably does not have the capacity to remain afloat unless it fundamentally changes its business model. The typewriter industry has essentially failed because of changing technology. On the other hand, a steel manufacturer might need to change how it manufactures steel, or restructure its debts and obligations, but the demand for steel continues despite some changes in how it is used.
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Is the business model being used the main reason it failed? The reorganization team should look at how the company has been conducting business and where it is focusing its efforts. If most of the sales were coming from one area of focus, they might recommend casting the net wider. This is part of the restructuring plan that can lead the company into new areas and adopting a new business model. For example, a typewriter manufacturer might explore whether it can stop making typewriters and start manufacturing laptop computers.
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Would the company shareholders achieve more if the company was liquidated rather than extending its life? Sometimes, the most economically prudent step is to unwind a company rather than change its business model or attempt to restructure it. Rather than waiting until all the value of the company has dissipated, our attorneys might recommend immediate liquidation to shield the owners and shareholders from losing the value of their work.
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Is there an option for merger and acquisition? Some business organizations move into mergers as a way to avoid bankruptcy. The right merger opportunity can provide a path to revising a failing business model and opening up new areas of focus or production. Mergers and acquisitions can provide some of the same restructuring opportunities as bankruptcy, but it can also be equally disruptive to the company and its employees. Determining whether a merger is either feasible or ultimately profitable requires careful analysis by the restructuring team of business and legal experts.
Depending on the results of the above analysis, restructuring can lead to the following beneficial results:
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Reduce operational costs. Operational costs include employee compensation, the cost of running multiple locations, redundant overhead, and more.
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Improve its competitive advantage. Restructuring can shift the business focus to the core business of the organization or to more profitable areas, while eliminating less profitable ventures.
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Prepare for a merger with another company. When a new company comes on board, there are casualties, mainly managers and staff. This means a company that merges with another has to reduce cases of duplication of roles and tasks and jobs overlay. Streamlining a company’s workforce during a reorganization makes it a more attractive target for acquisition.
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Weed out some dead wood, including inside the board. Some organizations are run by boards and executives who aren’t in tune with the mission of the organization, or do not lend strength and vision to help the company move forward and adapt to changing times. Restructuring helps introduce some new energy and new ideas in running the company.
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Introduce new technologies. Part of restructuring to make a company more efficient includes adapting to and adopting new and more efficient technology. Sometimes this effort involves laying off some staff or even adding new business sectors that will push the organization to greater heights.
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Introduce a new strategic partner. Acquiring a strategic partner is not always the same as entering a merger or being acquired, although . Instead, with a strategic partner a company engages with a new partner to get into new areas of focus. The partner can also be a merger. When this happens, the company needs to restructure its goals and mission to be in tandem with the new partner.
In sum, whether a business should liquidate or reorganize as a going concern depends on numerous factors. Some of those factors are within the business’s ability to alter or control, and some are not. Analysis of the business’s status, needs, and opportunities should be done by a team including the business’s leaders, consultants, and expert legal counsel. At JRFPC, our attorneys are ready to assist whether your business is a sole proprietorship or a major corporation, as we have experience at all levels.
Adversary Litigation
Adversary Litigation
The attorneys at John R. Foley P.C. are experienced in a variety of adversary proceedings, large and small. We have represented debtors, creditors, and trustees. We understand the ins and outs of bankruptcy litigation and how it differs from—and resembles—traditional litigation. Bankruptcy litigation differs significantly from bankruptcy practice and from civil litigation, requiring specialized knowledge of the Bankruptcy Code combined with a thorough grasp of civil litigation practice. An attorney specializing in bankruptcy litigation will also be a skilled negotiator, as many claims settle rather than continuing through a full bench trial.
Not every bankruptcy case has an adversary proceeding. In fact, adversary proceedings are relatively rare and typically occur in larger and corporate bankruptcies. Most bankruptcies are not adversarial and are resolved with cooperation between the debtor, the trustee, and the creditors. Nevertheless, adversary proceedings are an extremely important aspect of bankruptcy when they occur.
While staying within the parameters of the Bankruptcy Code, we zealously pursue our clients’ interests. JRFPC has attorneys admitted to the Eastern District of Michigan Bankruptcy Courts as well as the Southern District of New York.
About Adversary Litigation
An adversary proceeding is a case within a case, so to speak. When a debtor files for bankruptcy, the bankruptcy itself (also known as a petition for relief) is a “case” as that term is generally used. An adversary proceeding is essentially a lawsuit that takes place within the bankruptcy and subject to the bankruptcy court’s jurisdiction. Most disputes are handled by the bankruptcy court, but in a few types of cases the bankruptcy court can only make recommendations to the federal district court.
Adversary proceedings generally include causes of action that either are created by the Bankruptcy Code or that relate to the administration of a bankruptcy estate. Examples of adversary proceedings include objections to confirmation of a plan of reorganization, and objections to discharge, or the discharge ability of certain debts (a case typically brought by a creditor). Adversary proceedings also include claims asserted by the bankruptcy estate against third parties, motions seeking to obtain possession of certain property belonging to the estate, and the determination of the extent and validity of liens.
For example, a Debtor might file an adversary proceeding against a landlord over a lease disagreement. Because the Debtor is in bankruptcy, a lawsuit that would normally go through state courts is filed in the bankruptcy court instead.
One key difference between adversary proceedings and cases in state or federal court is that there are no juries. An adversary proceeding is a trial in front of the bankruptcy judge.
Disputes attributed to bankruptcy are common, but not all adversary proceedings are central to the bankruptcy. The bankruptcy court divides cases into core and non-core issues based on the relationship of the matter to the bankruptcy issue. Core issues are those that are closely related to the bankruptcy itself, such as disputes over the contents of the debtor’s estate. Non-core issues often pre-date the bankruptcy and involve matters that would need to be resolved regardless of the bankruptcy, such as tax disputes.
The bankruptcy court has jurisdiction over core issues and can make rulings on them. For non-core issues, the bankruptcy court may still conduct a trial, but the court cannot determine the issue. Instead, the bankruptcy court will make a recommendation to the federal district court.
Adversary proceedings between debtor and creditors: Disputes between the debtor and the creditors can stem from a variety of causes. One of the most common questions in an adversary proceeding is whether the debt in question is dis chargeable. Some debts, under current law, cannot be discharged in bankruptcy. For example, domestic support obligations (such as child support and some spousal support) and student loans cannot generally be discharged in a bankruptcy, and therefore remain as obligations of the debtor.
Other issues presented in bankruptcy adversary proceedings include whether a party violated the automatic stay, or whether the Debtor made fraudulent or preferential transfers, or any number of other types of cases. A creditor may also file a lawsuit against the Debtor if the creditor has reason to believe the Debtor filed bankruptcy to escape payment obligations. The Debtor may file an adversary proceeding against a creditor as well, for example if the Debtor is seeking to discharge a lien.
Between the debtor and trustees: A trustee can bring the same kinds of adversary proceedings that a creditor can, such as objections to discharge or adversary proceedings based on disallowed transfers. A trustee often brings an adversary proceeding to bring property back into the Debtor’s estate, such as property that was transferred outside certain parameters. The trustee and Debtor also sometimes litigate over exempted property and whether it should be sold to compensate the trustee.
Inadvertent fraud: Many adversary proceedings involve fraud on the part of the Debtor, and that fraud is often completely inadvertent. Unlike civil fraud, which requires intent, a Debtor can commit fraud according to the Bankruptcy Code simply by paying the wrong thing at the wrong time. It is important to work with an experienced bankruptcy attorney before filing for bankruptcy to avoid committing such fraud. A good attorney can help a potential debtor minimize claims of fraudulent and preferential transfers, as well as defend against such claims in a bankruptcy. Creditors and trustees, however, need to know what to be alert for to determine whether to bring an adversary proceeding based on such transfers.
Bankruptcy Litigation
Issues common in bankruptcy litigation cases: disputes between debtors and creditors, debtors and trustees, and between trustees, creditors and other interested parties.
Between debtor and creditors: Disputes attributed to bankruptcy are common. However, the court determines such cases based on the relationship of the matter to the bankruptcy issue. The issues are divided into core issues and non-core matters.
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Core issues: the bankruptcy case determines the core issues, such as the litigation touching on the debtor’s right to keep the property under dispute, yet it is under bankruptcy exemption. The judge in the bankruptcy case is left to make a ruling.
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Core issues: the bankruptcy case determines the core issues, such as the litigation touching on the debtor’s right to keep the property under dispute, yet it is under bankruptcy exemption. The judge in the bankruptcy case is left to make a ruling.
On the other hand, the dispute between the debtor and the creditors can yield various conditions. One of the dominant factors is the discharge ability of debts. Some debts will remain despite the bankruptcy. Thus, it might require either the debtor or the creditor to ask the court to make a ruling on whether the debt will continue to exist despite the bankruptcy lawsuit. If the court issues a discharge, the creditors or the debtors are not obligated to pay the debt.
On the contrary, a creditor can file a lawsuit against the debtor if they believe that the debtor has defrauded them or the court. Such disputes are directed at protecting the rule of law, especially when there is evidence that the debtor filed for bankruptcy to escape payment obligations. In another case scenario, the debtor also files a lawsuit demanding the creditor to show proof that they are indeed bankrupt. Proof of claim is a necessity for supporting the prerogative that the creditor cannot make the payment they owe. For example, medical bills, credit card debt or past-due utility bills.
Between the debtor and trustees: The creditor can also file a lawsuit challenging
the debtor’s right to be discharged from making payments. Bankruptcy frauds are
common when the debtor does not want to make the payments their clients demand.
Bankruptcy fraud can be detected when the debtor fails to list a property they own
when filing a bankruptcy claim.
Then again, the trustee can take legal direction against a debtor with the right to
keep an exempted property. However, the debtor can file for a counter lawsuit to
protect the exempted property from being sold to compensate the trustees.
Between trustee, creditors or the interested parties: Some bankruptcy disputes
lead to the involved parties exercising their legal powers to protect their investments.
For example, the trustees can resort to using their powers to take the debtors assets
— for instance, request for a refund on money sent to the creditor before filing for
bankruptcy. The trustee is assured that the money was never spent or it was the
creditor’s technique to defraud them.
Our attorney can help you with avoiding committing bankruptcy fraud. It is advisable
to be transparent when disclosing any financial details for example, including all the
data on property, creditor, and income sources. You should work closely with an
attorney when making a fraud claim. Debtors rarely face fraud accusations because they are alert that a creditor or trustee can raise the applications at any point. Therefore, make use of our skilled attorneys before filing bankruptcy claims.
Issues In Bankruptcy Restructuring & Reorganization
Individuals and institutions require taking action to prevent the need to file for a bankruptcy claim. The involved party restructures its debt levels to avoid overspending or mismanagement of funds and assets. Even though the bankruptcy restructuring is a complex discipline, the services of an experienced attorney can help with developing a suitable plan.
A company can file for a court-supervised restructuring for protection from creditors who would like to retrieve their funds before the process is complete. Most troubled companies will opt for the out-o-court restricting and reorganization where they settle the matter with their creditors. More so, some companies fail in restricting and reorganization strategies because of the competing interests. The debtors are at high risk because they hold the problems of other involved parties. On the other hand, an attorney who is representing the creditor attempts to recover as much debt as possible.
The services of our attorneys are critical in representing your best interests during bankruptcy restricting and reorganization. Our attorneys will analyze your unique situation to find the root cause that leads to bankruptcy and then conduct a feasibility plan for avoiding it. The red flags are usually present, and they require an experienced person to address them.
Our law firm works with your financial adviser to come up with the best model. The negotiation with the creditors is also critical to make sure that you do not offer a promise that will endanger the recovery of the organization. In case the talks are successful, the attorney will help with structuring a payment plan for each of the individual creditors.
A court-supervised restructuring for debtors will also require the intervention of an attorney. Communication plan is critical in addressing the issue, especially when discussing the employees, shareholders, and clients. Besides, the entire process requires documentation as a gesture of respecting the law.
Our law firm is ready to handle all your insurance and bankruptcy-related cases. It is advisable to restructure and reorganized for the survival of the company. We represent debtors and creditors through the guidance of ethics and transparency. Take action today by utilizing our consulting services. Our team of attorneys is willing to offer you the help you need.