Small Business Owners and Guaranties

Leave a reply

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

Leave a reply

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

Leave a reply

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?

Leave a reply

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

Leave a reply

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

Safer in Bankruptcy — the Wrap Up

Leave a reply

At the conclusion of a bankruptcy an Order is entered called the discharge.  It is the discharge that functionally eliminates the debtor’s personal liability (meaning his legal responsibility for paying) the debt incurred prior to the bankruptcy filing.  In many ways the discharge is the wrap up of the whole bankruptcy process, and it makes everything that happens before it final and permanent.

The downside of the discharge is that it also means the debtor is once again outside the safety of the bankruptcy court and back in the real world — although without all the baggage that caused the bankruptcy filing in the first place.

Clients are thrilled when they get their discharge.  It is OVER!  I am free!  I am frequently a bit wistful, because I know that when something else happens (and life is always happening), the debtor may be less comfortable inside the bankruptcy; but the debtor is far safer.  Inside of a Bankruptcy the Debtor is protected by the Automatic Stay and the Confirmation Order (if in a reorganization chapter).  Those things mean procedural protections and, most importantly, time, to deal with whatever life throws at you.

We have a false feeling of control over our lives.  Really what makes debt and bankruptcy both so scary is the sense of being out of control — but we are used to that.  We aren’t used to bankruptcy so it feels scarier, when in many cases it is far safer.

We are living in the most uncertain times that any of us have lived through, and we are all going to have to learn new survival skills.  I hope that for you bankruptcy won’t be one of them, but if it is, try to be less anxious rather than more.

Elaine

Safer in Bankruptcy Part 3 — The Confirmation Order

Leave a reply

Confirmation orders are only entered in reorganization chapters (for consumers most normally a Chapter 13), but when they are entered, they constitute a new contract between all parties to the order (which includes the debtor and all of the creditors in the case).  This new contract requires, among other things, that the debtor be treated as current.  It limits the creditors’ ability to get paid only as provided for in the plan.  It limits a creditor’s ability to charge late fees or to apply payments in ways other than as specified in the plan.  Now, some of the protections of the Confirmation Order require that the debtor successfully complete the plan and receive a discharge; but it remains a potent form of protection for a debtor in a chapter 13 bankruptcy.

Another thing that makes a Confirmation Order particularly valuable during uncertain times is that it can be modified by Motion and Order.  That means that if bad things happen during a multi-year plan of reorganization, the Debtor can ask the Court to modify the Confirmation Order to allow the debtor room to cope with the unexpected.  The ability to request a modification means that if something bad happens during a Chapter 13 bankruptcy, the Debtor is almost always going to have time to address it, and if a little time isn’t enough the tools to change payment terms or sometimes even to extend the repayment term.

One of the surprising aspects of the CARES act (one of the principal pandemic assistance statutes) is the ability to extend a chapter 13 repayment plan from 5 years to 7 years.  Now, this only applies to cases that were confirmed before March 27, 2020, and the provision will sunset on March 27, 2021.  Still, for people experiencing a decrease in income for an extended period of time, this provides a unique tool for curing arrears on secured debt.

The incredible protections of a confirmation order are one of the reasons I am recommending Chapter 13 filings during this time of great uncertainty.  It can be difficult to explain, but being in a chapter 13 can be one of the safest places to be during times as scary as the ones we are currently living through.

Elaine

Yes, Virginia, You Can Qualify for Unemployment

Leave a reply

I interrupt this week’s trip through the protections of the bankruptcy code to focus a few minutes on the extraordinary unemployment benefits available for residents of the State of Oklahoma during the COVID-19 (Corona virus) pandemic.

Ordinarily, at least in Oklahoma, self-employed people (including independent contractors, sole owner/employees of S-Corps or LLC’s, gig workers, etc.) are not eligible for unemployment benefits.  The reason is, because traditionally in order to be eligible for benefits your employer had to pay into the system (which is a mandate for most employers). Then, when an employee goes to collect from the system, the computer system designed to process that application checks to make sure that the applicant is a covered insured.  If you aren’t a covered insured (i.e., if no employer has been paying into the system on your behalf), then the computer system is designed to reject your application out of hand.

EXCEPT!  Recent legislation out of Congress has changed that.  Yes, I know in Oklahoma employment benefits are processed and paid out of the Oklahoma Employment Security Commission, which is a STATE agency.  It is not under the control of Congress — most of the time.  Congress has always had a hand in the unemployment system, even though it is largely controlled and exclusively administered by the States; and a few weeks ago Congress flexed a little muscle (and a lot of money).

Now, because of the current pandemic, people who have never paid into the system — self-employed, gig workers, sole proprietors, sole owner/employer of an S-Corp or an LLC — are all now eligible to collect from a system they have never paid into.  But WAIT, it gets better!   Congress is ponying up the cash to increase most people’s weekly benefit (and by a lot — like $600 for most), they have extended the number of weeks that benefits are available, and they have eliminated the week off work that you have to wait before you are eligible to collect benefits.  Oh, and they have also dispensed with the weekly requirement that all applicants be actively looking for work (you know, during that whole shelter at home thing).

So, what’s the catch?  Come on, you know there is one.  The catch is that Oklahoma’s unemployment computer system was completely unprepared for this.  First, there is the eligibility for an insurance program of people who have never been insured (i.e., paying into the system).  Then, there is the increased benefit, the changes in timing and eligibility requirements.  Its enough to give an ancient computer system a nervous breakdown.  In all fairness I don’t know that our unemployment system is still built on COBOL (New Jersey has made a lot of news for their COBOL system looking for retirees willing to come back to work on it.)  Ours may be Fortran, but whatever it is — it ain’t new.  Then, the people who are needed to maintain and rewrite it to adapt to these major changes are all — working from home — in their pajamas and slippers.  Add to that record setting unemployment levels and you have a disaster waiting to happen — and it is happening.

So, here is the skinny straight from Oklahoma State Representative Mickey Dollens:

UPDATED 4/14/2020 – OKLAHOMA UNEMPLOYMENT:

The following guidance, tips, recommendations, comments, and answers will help you navigate the unemployment filing process. I’ll do my best to answer your questions in the comments section. If I don’t know the answer then I’ll seek out those who do.

🔺Self-employed workers, independent contractors, free-lancers, and gig economy workers who are not typically eligible for unemployment benefits will be covered under the federal Pandemic Unemployment Assistance (PUA) program which is part of the new CARES Act:

• The Oklahoma Employment Security Commission (OESC) cannot implement these extended unemployment benefits for independent contractors until guidance is handed down from the U.S. Department of Labor on how to administer these benefits.

• Independent contractors must provide alternate forms of financial documentation (pay stubs, invoices, 1099’s, etc.) This is different from what is required for traditional claims.

• If an independent contractor applies for unemployment benefits right now, they will receive an immediate denial message. DO NOT REQUEST AN APPEAL. Any appeal will delay your claims process. Those individuals must wait until OESC has implemented the guidance from the U.S. Department of Labor and updated its system to allow for the processing of PUA claims. OESC is hoping this will be mid-late April.

• Having mentioned the above, both W2 and self-employed can start the process by filing an online claim: https://unemployment.state.ok.us

• Self-employed are not required to file weekly claims while the state waits on the Federal implementation of the PUA program. They will start filing weekly claims at that point.

• W2 claimants ARE REQUIRED to file claims every week as soon as you file. If possible, it’s best to do this each Sunday because this triggers payment. During the emergency all work search requirements are waived. But be sure to respond “yes” when you are asked if you have made your required weekly work searches. Otherwise your benefits will stop.

• It is important to note that once OESC receives the necessary PUA guidance, OESC will backdate all independent contractors claims to March 30, the date the CARES Act went into effect.

• All claimants are eligible for an additional $600/week in Federal unemployment supplemental benefits. The Federal supplemental benefit starts the week of April 4, 2020, and runs through the week ending July 25th, 2020. All claims will be backdated to the date your covid19 related job loss occurred. In some cases, claims may be backdated all the way to Feb. 8, 2020.

• There is no additional process required to receive the Federal unemployment supplemental funds. All approved claimants will receive this automatically.

• Benefits begin as soon as you file. The one week waiting period has been suspended. All claims filed with an effective date of 3/15/20 or later will have the waiting period waived for the duration of the emergency.

🔺Here is some general information:

• Oklahoma provides for 26 weeks of unemployment. The new federal CARES Act adds 13 weeks of additional unemployment for a total of 39 weeks.

• OESC has expanded its call center to better serve claimants. The average call wait time has dropped significantly from last week: 1-800-555-1554

• OESC designed a more user friendly website, https://oesc.ok.gov. However, as of 4/11/20 some of their answers in the FAQ have not been updated to reflect the extended benefits provided in the Federal Cares Act.

🔺Here are some additional tips for those who are self-employed:

• File a claim for PUA as soon as it becomes available. (OESC says mid-April.) If you’ve already filed a claim, that’s fine. OESC will announce when the PUA program is implemented and ready independent contractors likely by mid to late April.

• When filing a claim as self-employed the application will ask for your “employer.” Use your name here. The requirement to put your resume on okjobmatch is waived for the duration of the emergency. At this time the OESC has also waived the work search requirement. List the day you were laid off when it asks for “start date” and keep blank for “end date”

• If the application tells you, “self-employed do not qualify,” or “monetarily ineligible for lack of reported wages“ simply click “continue.” DO NOT FILE AN APPEAL. If you’re self-employed then it is not necessary to file weekly claims until PUA is implemented. You will still receive back pay once the PUA kicks in.

• When you file your claim you will be asked for information about your separating employer. If your separation was due to the business closing or reducing hours due to COVID-19, please mark your reason for separation as a “LACK OF WORK.”

• You will receive an email and or letter saying your application was denied. This means the system hasn’t been updated yet. Save your claim ID number. Do not file a monetary appeal.

Again, OESC will announce when the federal Pandemic Unemployment Assistance program is ready to be administered, which should be mid-late April.

• Benefit amounts will be calculated based on previous income.You will need financial records such as tax returns or pay stubs that document your earnings.

• To check the status of your claim, go to https://unemployment.state.ok.us/w2.aspx You will find information regarding the status of your application, recent activity, monetary entitlement, and determinations of eligibility.

• An unemployment benefit debit card will be issued to you at the time your first eligible week processes. It normally takes between 7-10 days to receive the card. If it takes longer than 7-10 days then they likely ran out and will send you a card as soon as they’re restocked. If you receive a debit card with no balance, that probably just means that your eligibility to receive benefits has not been processed yet.

• If you want to have your benefit deposited directly, visit GoProgram.com or call 1-866-320-8699 and use the automated system to enter your banking information

•If you experience difficulties in filing your claim you may e-mail OESC Helps at oesc.helps@oesc.state.ok.us or call 1-800-555-1554

• If you don’t have internet then you can mail copies of two forms of IDs (one has to be a photo ID) to: OESC P.O. Box 52006 Oklahoma City, OK 73152-2006

🔺Final thoughts:

• Here’s an informative article that goes into more details about the UI provisions in the CARES Act: https://americanactionforum.org/…/enhanced-unemployment-b…/……

•Please be mindful about fraudulent activity at this time. Fraudsters are coming at us through websites, phone calls, and even in person. Be assured you can trust https://govstatus.egov.com/oklahoma-coronavirus-information to connect you directly to government websites for general updates, business help, unemployment help, and all things COVID-19.

One important change in this advice from Rep. Dollens is regarding the advisability of filing an appeal.  Last week House Minority Leader Emily Virgin was advising filing an appeal.  Evidently, the system has been tweaked since then.

Regardless, this is the latest information that I have available regarding these extraordinary employment benefits for these extraordinary times.  What I can tell you is that a client of mine who filed at my urging got his benefits debit card in the mail yesterday.

Good luck, remember, the people at OESC are slammed, their system is crumbling around them; and if you get nowhere — call your State Rep or your State Senator — both of whom have way more time on their hands right now than anyone at OESC.

Elaine

Safer in Bankruptcy — Part 2 — The Automatic Stay

Leave a reply

The instant that a bankruptcy is filed an order is entered automatically, and it stays (or temporarily stops) all collection activity against the debtor or property of the debtor.  Instantly.  Automatically.  Boom.  All collection activity must stop.  That means lawsuits, wage garnishments, nasty letters, annoying phone calls (Ok, so I don’t know any court that has managed to stop the car warranty calls, but we’re working on it.).

That order remains in place until either the Court modifies or lifts it, the Debtor’s discharge is entered or the case closes without a discharge.  The automatic stay is designed to give someone who has just filed for bankruptcy literally months of breathing room.

Where the automatic stay is most likely to get cut short is when someone files for bankruptcy and doesn’t continue making payments on a secured loan — most commonly a car payment.  In that case the lender has the right to ask the court to lift the stay and let them repossess the car.  A chapter 7 bankruptcy is not the right place to be if you are not current on a vehicle that you need to keep.  If that is the case, file a chapter 13 bankruptcy.

However, if you find yourself with more debt than you can pay, but you are current on your car loans and mortgage (if you have them), but your phone is ringing off the hook, you are afraid to open your mail, and your payroll office has just received a wage garnishment; the automatic stay is the legal equivalent of a Calgon bubble bath commercial from the 70’s.

Elaine

Safer in Bankruptcy – Part 1

Leave a reply

One of the things I am working on this weekend is a demand letter to the attorney for a local credit union.  You see, someone at the credit union seems to have thought that taking advantage of an elderly man with early stage dementia was a profitable idea.  I will concede that under ordinary circumstances what they did might qualify as greedy and morally questionable; it should, however, be legal.

Not so fast.

In this case the elderly customer just happened to be in an active Chapter 13 Bankruptcy, and the Credit Union knew this.  They got checks from the Chapter 13 Trustee on this man’s loan accounts up until the events I am upset about happened.

It would be inappropriate and unnecessary to go into what actually happened or why I think it happened.  What is relevant is that when someone is in an active bankruptcy, they are under the protection of the Bankruptcy Court.  That means that there are orders in place that are designed to protect them from their creditors.  The credit union in the case I am currently working on appears to have violated several of those.

Over the next few days I am going to talk about what those orders are and how they can be used to keep you safer inside a bankruptcy than outside — particularly in uncertain times.

Elaine