Monthly Archives: May 2020

Are the Courts Open?

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As Oklahoma is in the process of reopening after the Caronavirus shut down, it is a reasonable question to ask if the Courts are open.  The answer is — well, that depends?  Which courts and what do you mean by open?

The Federal Court system, which includes the Bankruptcy Courts, has had a paperless filing system in place since 2006.  That means that as a practical matter, the Courthouse no longer accepts paper, and filing by computer doesn’t violate social distancing, so filings have gone on as usual — well, sort of.  I am now reviewing and signing documents by remote using videoconferencing and electronic signatures, but actually filing the documents is the same as it was six months ago.

The Federal system has also moved to allow for telephonic hearings, and it has postponed jury trials and large evidentiary hearings.

The State system, however, is not so simple.  The State courthouses have been closed to the public for more than a month.  Filing of pleadings in existing cases and of new cases continues — by mail, email or fax.  In civil matters, the only hearings being conducted are emergency matters.

All of that is in the process of changing, but every County is proceeding according to its own rules and its own schedule.

What my clients want to know is can they still be sued, what happens if they have a pending answer date, when can a house in foreclosure be set for Sheriff’s Sale?

Those answers aren’t easy, but in most cases court clerk’s offices have been accepting new lawsuits for filing.  However, answer dates have been extended by order of the Supreme Court.  Sheriff’s sales have not been happening, but I am seeing them being reset.  Cleveland County has one set in early June, for instance.  So, if you have had a house in foreclosure, it is worth it to keep an eye on your mail, the court’s online docket and your County Sheriff’s Sale list.

Elaine

Small Business Owners and Guaranties

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Typically, small business owners generally wind up being liable for most (if not all) of the business’ debt.  The biggest reason for this is that it is rare for anyone to lend money to a truly small business without requiring that some individual be on the hook for repayment.  Now, I realize that small business can have a broad meaning — according to recent SBA loan programs, the LA Lakers qualify; but when talking about really small businesses with limited assets, limited funding and a one or two tier management structure; most lenders want to know that some body is liable for the debt.  The most common way of making that happen is requiring that the owner sign a personal guaranty for the debt.  This means exactly what it sounds like, the business owner is guarantying that the debt will be paid by the owner if the business fails to pay it.

The second most common way that business owners wind up being liable for debt is carelessness.  All too often when an account is opened with a vendor or something is signed for, the business owner simply scrawls his (or her) name on the signature line.  Well, when you sign your name, you are generally committing yourself personally to the repayment of whatever you just signed for.  The way around this is to always sign for things using your business capacity — Jane Doe, as President of Jane’s Business, Inc. or as Manager of Jane’s Business, LLC. or in some other way indicating that the signature is solely on behalf of the business entity and not the individual.

The exception to this is that if the business is not an entity registered with the State (like a corporation, LLC or partnership), there is no one who can be liable for the debt other than the business owner.  In that case the business owner IS the business.  This is called a sole proprietorship or a d/b/a (doing business as).

The third way that owners become liable for business debt is because they fail to maintain the business in good standing with their State.  In Oklahoma the Secretary of State requires that corporations and LLC’s file annual paperwork with the State and pay a small fee in order to remain in good standing.  If a business owner allows the corporation or LLC to fall out of good standing, then personal liability may attach for debts incurred in the meantime.  The ability to remove that personal liability by reinstating the corporation or LLC depends on a number of factors.

If you own a small business, and it has incurred more debt than it can easily keep up with, you need to know what your liability is for that debt.  If you don’t know, consult a legal advisor.  You will also want to make sure that your corporation or LLC is in good standing with the State.  Don’t just assume that your Accountant has taken care of that when preparing your taxes each year.  It is easy to go to the Secretary of State’s website, search for your name and verify your status.

Elaine

 

Why Your Business Probably Won’t File for Bankruptcy

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Chapter 7 is the most commonly filed chapter of bankruptcy — but it is very rarely filed by a Corporation, Partnership or LLC.  We can all name lots of businesses that have filed Chapter 11 bankruptcy.  Traditionally, that has been a large, expensive, complex reorganization.  Exxon, most of the Airlines, General Motors, Sears, J.Crew.  It is a long list.  I will bet, however, that you can’t name a single Corporation that has filed a Chapter 7 Bankruptcy.

The reason for that is actually quite simple.  Lots of business owners would love to file a Chapter 7 for their wholly owned LLC and walk away from the business debt — except they can’t.  You see only an individual (that means a human being) can get a discharge in a Chapter 7 bankruptcy.  That means that if a corporation or an LLC files a Chapter 7 bankruptcy, it gets to turn over all of its assets to the Trustee to administer for the benefit of its creditors, but it doesn’t get out of its debt.  Now, it comes out of the bankruptcy with no assets with which to pay any of its bills — but it still legally owes the money.  So, you spend a lot of money, you turnover the business assets to the Trustee, you expose the owners and managers of the business to potential liability — and get absolutely nothing in return.  Not generally a great plan.

Instead, what generally happens, is that the business owners liquidate the assets themselves.  They have to stay within certain legal parameters, but they do have some control over how the assets are liquidated and how the proceeds are distributed.  Also, they can pay themselves a reasonable amount of money for doing it.  Then, they shut down the Corporation or the LLC.  Of course, since most small business debt is guaranteed by the owners (one way or another) the owners may then need to file their own Chapter 7 bankruptcy, but they are eligible for a discharge.  Also, this doesn’t mean that the owners inherit the unpaid business debts. If the owners weren’t originally liable for the debt, they don’t become liable for it.  It is just rare for small businesses to incur any significant debt without a personal guaranty from someone.

Of course, since February of 2020 there is now a viable small business reorganization subchapter.  So, it is now much more viable to reorganize a small business in a bankruptcy, if remaining in business is a viable option.  If it isn’t, however, it is rare to shut down a small business in a Chapter 7 Bankruptcy.  There are better ways to deal with the business entity outside of bankruptcy then inside.

Elaine 

Buying Time to Stay Afloat

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The most valuable tool for saving a business in turbulent times is frequently — time.  I read an article yesterday explaining why oil will be $100 a barrel by the end of the year — that is less than eight months from now.  Whether that prediction is true or not, oil isn’t likely to go a whole lot lower.  So, how do you hang on until the world changes again?

You know where your cash flow goes.  How much more profitable would you be, or just how much longer could you last, if you could change where your cash flow goes?

If you could not pay the debt — at least for a while?  If you could break leases without penalty?  If you could change all the things we are trained to believe we can’t change?  Well, except for taxes.  Let’s not get carried away here.

How much time would you need to redirect your company’s resources?  Can your welders make something else?  Can your trucks move something else?  Can your people do something else?

If you need time, if you need to drastically remodel your cash flow, if you need to redesign your business or just your business model — do the unthinkable.  Call a Bankruptcy lawyer.  We don’t just end businesses.  We can help reinvent them.

Elaine

 

Should You Apply for a Forbearance?

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Lots of creditors are offering forbearance deals right now.   The thing to remember about a forbearance is that it doesn’t erase the debt — and that can be either a useful tool or an anchor around your future neck.

The first thing I will tell you about any forbearance agreement is to read it — all of it.  Ask questions, especially about the pay back and especially about interest rates and fees.  What will it ultimately cost you?  Then consider what it is that you are forbearing and what are your other options.

Credit cards are offering forbearance plans, and they can be really nice tools.  Ask all the questions, and then ask yourself one more.  What is the likelihood that I will be filing for bankruptcy before I get this account paid in full?  Remember, forbearance agreements are intended to be repaid, but if it is an unsecured debt and you wind up filing for bankruptcy anyway, the balance owed at the time that you file for bankruptcy is not likely to be repaid regardless.  So, doing a forbearance deal with credit card companies can be a useful tool, especially if it frees up cash for you to stay current on your home, your car or your utilities.

I will caution you that borrowing money with the intention of filing for bankruptcy and not repaying it is called bankruptcy fraud, and it is seriously illegal.  So, don’t enter into any agreement with the intention of not following through.  Understand, however, that intentions and future realities can differ for many very real reasons — including the simple fact that we are living in very uncertain times.

Many utilities are offering forbearance options as well.  Do what you have to do to keep the lights and the water on, but do stay informed about the policies and regulations governing shutting off service.  Knowing that can help you negotiate a better deal.  Also, if you wind up filing for Bankruptcy, the utility companies have some special rights.  They can require a new deposit in order to continue providing service after the case is filed.  Of course, you will have to pay for all service as the bills come due after you file as well.

Mortgage forbearance offers are different.  They frequently simply defer a few months payments with the expectation that they will all be repaid in a lump sum at the end of the forbearance period.  Sorry, but that is neither likely nor helpful.  A second option can be to apply for some type of permanent loan modification at the end of the forbearance period.  That would be more helpful (depending on the terms of the modification), but it can be difficult to predict at the beginning of the forbearance period what the likelihood is of getting a favorable modification some months in the future.

Counting on a future modification can wind up with a mortgage account falling further and further behind with not just missed payments but also a host of fees assessed by the mortgage company.

A mortgage forbearance may also add the missed payments to the end of the mortgage term.  Consider carefully how the accrual of interest will effect this.  I am frequently surprised by the number of people who don’t do the math to figure out just how much that forbearance will cost them.  It may still be the right decision, but once your future straightens out a bit, it may be very wise to start making small payments every month towards getting those payments paid sooner.

Another thing to consider is that a Chapter 13 bankruptcy is one of the best tools for getting current on a mortgage.  So, if you take a forbearance agreement hoping that you will get a loan modification or an extended time to get the payments current — and that doesn’t work out.  A Chapter 13 filing can give you up to five years to cure a mortgage arrearage.  A Chapter 13 filing can also deal with credit cards that have forbearance balances and give you limited abilities to get utility services back in good standing.

Always remember, no matter how bad things look, it is always worthwhile to know your options, and that includes knowing what a bankruptcy will or won’t do for you.

Elaine

 

 

 

Small Business Struggles

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Despite all the dollar signs flying around in the press, small businesses in this Country are in trouble — pretty much all of them.  Yea, I know about the SBA programs, PPP and EIDL and forgiveable advances — yea, I know.  Small businesses are still in real trouble.  Closures, oil prices, reduced sales, reduced interest, changes in customer habits, ill employees, increased insurance costs.  Small business are just in trouble, and there is no magic wand that is going to fix it all on May 1 or June 1 or even next fall.

I am looking at three strategies.  First, managing cash flow.  Deferring payments isn’t a cure, but it buys time to refocus.  Reducing expenses, cutting deals with lenders.  It all  helps, even if all it does is buy time.  Second, now is the time to confront the fundamentals.  Can this business be profitable in the new world in which we find ourselves?  Can it lure its customers back?  Does its community have the cash flow to buy what it is selling — particularly a problem in the oil patch, right now.  Third, if the business can restructure its debt, reduce interest rates, change payment terms, eliminate a lot of the unsecured debt; does that make a critical difference?

If the answer to that last question is yes, you need to know about the brand new Subchapter V in the Bankruptcy Code’s Chapter 11.  There are some amazing new tools to restructure small businesses that just became available in February, 2020.  It is going to make the difference for a lot of businesses between having a future and not.  The statute was passed last Fall, it went into effect in February, 2020.  Nobody knows what all it can do or not do just yet, but it is a game changer for small businesses caught with too much debt in a sudden downturn.

More on that in the next few days.

Elaine