The much-heralded bankruptcy law that took effect in October 2005 did not have a major impact on businesses. Most of the changes were aimed at individuals. Nonetheless, for businesses facing insolvency, bankruptcy remains a viable option.
Business owners still have to consider carefully what kind of relief is available to them, what the universe will look like after financial problems surface, and whether filing for bankruptcy is a smart move for them. But, a decision regarding filing is not one to make without consulting professional advisors regarding the advantages, disadvantages, and possible outcomes.
Smart Business discussed the pros and cons of bankruptcy with Vincent Slusher, partner and chair of the Bankruptcy Section at Godwin Pappas Langley Ronquillo LLP in Dallas, to get an idea of how it affects business owners, the myriad details associated with the process, and the value of advisors who specialize in that field.
Are there any advantages to filing bankruptcy for a business?
Filing for bankruptcy provides businesses faced with overwhelming debts immediate relief from creditors, and a breathing spell that gives them time to reorganize and develop a strategy for the effective reorganization of their operations.
What are the disadvantages?
Meeting deadlines and complying with reporting demands can be time consuming during a time when the company’s workforce has often been scaled down and profits are the goal. Often, these demands are frustrating to the president and CFO of the debtor. Furthermore, a company in bankruptcy operates in a fish bowl. The process is completely transparent. Debtors are generally surprised by the lack of confidentiality in the bankruptcy process.
Competitors and customers can use the information that becomes public as a factor in formulating their strategies for dealing with the bankrupt business. There are, however, procedures available to protect customer lists and other trade secrets of the debtor.
What alternatives to filing for bankruptcy exist?
The key to utilizing alternatives is to consider them early in the financial distress timeline. It is never too soon to consult a bankruptcy attorney or reorganization specialist. By investigating and educating themselves early, business owners will understand all the options that are available to take advantage of before bankruptcy becomes inevitable.
The first step is often for business owners to try and negotiate with creditors and investors to work out a plan to eliminate the immediate liquidity problems. Remember, business tends to be cyclical in nature. The cash flow solution might be simple if creditors are willing to work to establish payment plans to carry the business through the slow periods. Creditors are often willing to make such arrangements, especially if they have a long-term relationship with the business owner.
If that strategy is unsuccessful, business owners might need to employ professional advisors such as bankruptcy attorneys and financial advisors to establish payment plans with creditors or an out-of-court restructuring plan.
Often, because of the amount of the debt or the urgency of payment deadlines, the only remedy is a bankruptcy filing. Business owners should remember that these filings don’t typically happen. Attorneys need some lead-time to prepare the case before a petition for relief is filed in bankruptcy court. The sooner business owners involve bankruptcy professionals, the better the process will work for them.
Once business owners decide to file for bankruptcy, how should they go about it?
The safest approach is to work with attorneys who are bankruptcy specialists. They can efficiently guide you through the bankruptcy process and help your business enjoy the greatest benefits of bankruptcy protection.
Bear in mind that bankruptcy laws have been codified by the United States Congress, and they do not always make sense to a lot of people, particularly creditors. Bankruptcy lawyers are adept at making sense out of these laws, which benefits debtors and creditors alike in the long run.
These attorneys work with a wide range of people involved in the complex bankruptcy process, including business owners, financial advisors, insiders such as directors, and others with a fiduciary interest in the outcome to formulize payment and reorganization plans. In short, they guide business owners through a process they cannot negotiate themselves.
How do business owners select a qualified bankruptcy attorney?
Through due diligence. Business owners can ask their own attorneys, bankers, and other advisors for recommendations. They probably should not, however, talk to their own bankers, because they might be in a position where they have to reveal some potentially damaging information.
They can also check local and state bar associations, and Internet sites such as Martindale-Hubbell, which provides rating referrals. Sometimes, searching for individual attorneys’ names in conjunction with bankruptcy reveals some interesting results.
VINCENT SLUSHER is a partner and chair of Bankruptcy Section for Godwin Pappas Langley Ronquillo LLP in Dallas. Reach him at (214) 939-4492 or [email protected].