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What Every Business Owner Needs to Know About Bankruptcy and How to Avoid It.

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Presentation on theme: "What Every Business Owner Needs to Know About Bankruptcy and How to Avoid It."— Presentation transcript:

1 What Every Business Owner Needs to Know About Bankruptcy and How to Avoid It

2 Introduction Economic overview What businesses can do: –Strategic planning –Capitalization –Financing –Operations Debt is the problem; Bankruptcy may be the solution

3 Economic Overview Stock and bond prices up Employment down Energy remains expensive Housing remains flat GDP is limping along Disability is exploding

4 Too Much Debt Federal Debt = $17 Trillion or over $50,000/person in US Excludes unfunded future liabilities of approx. $100 Trillion and costs of Obamacare.

5 Too Much Debt –In 1929, Total Debt (Fed, corp, indiv) as a percentage of National Income (GDP) was 300%. The Great Depression followed. –In 2013, Total Debt (Fed, corp, indiv) as a percentage of National Income (GDP) is approximately 375%. The largest debt bubble in the history of mankind.

6 Debt-Fueled Consumption

7 Too Much Debt Inflation in asset prices – homes, stocks, Treasuries, food and gasoline Unproductive, unmanageable debt cannot be serviced Taxing, borrowing & spending is counter-productive

8 Avoiding Bankruptcy Strategic Financial Operational

9 Provide Exceptional Value What business are we in? Who are the customers? What do the customers value?

10 Competitive Advantage

11 Strategic Planning External Competitors Technology Customers Economic and political environment Internal Strength & Weaknesses Products Processes (production, marketing, fulfillment) People Management Supplier relations

12 Additional Steps Capitalization –Replace debt with equity Working capital financing –Increase and extend credit lines Focus on core business Cut costs Dont cut quality

13 Average Business Sell it now Workout; debt negotiation Do Not Use Retirement Assets hoping for an economic upturn Chapter 11 Restructuring

14 Chapter 11 Reorganizations –Used by GM, Chrysler, Blockbuster, Hostess Can be used by small businesses –Modify loans Reduce loan to FMV collateral –Reject contracts and leases –Sell assets –Pay unsecured creditors a small % –May need new equity 14

15 Chapter 11 Reorganizations –Exit Strategy Profitable restructuring plan Obtain votes Cash collateral –Fiduciary Duty –Reporting Obligations –Timing –Cost –Personal Guarantees 15

16 Debt is the Problem. Bankruptcy is the Solution. Most people file due to job loss, divorce, illness or business decline. Everyone wants to pay their bills, but they need to take care of their families. People avoid bankruptcy out of ignorance, fear and the stigma of failure. 16

17 Benefits of Bankruptcy Stop harassing phone calls and letters Stop foreclosure Stop repossession ( possibly get property back ) Stop wage garnishment Stop lawsuits Eliminate debts Reduce payments on debts Reject or restructure bad contracts 17

18 What Bankruptcy Cannot Do Eliminate the rights of secured creditors –Homes, cars –May be able to reduce or restructure the debt Discharge certain debts –Student loans, domestic support obligations, criminal fines and most taxes –Credit card usage immediately before filing Protect co-signers (with exceptions) 18

19 What Will Happen To My Credit? Most credit scores go up. –If you missed a mortgage payment or minimum credit card payment, your credit score is already low Old unsecured debt is eliminated No new bankruptcy for some time – 8 year limit on Chapter 7 to Chapter 7 filings Rebuilding Credit –3 years until new mortgage loans 19

20 Chapter 7 Liquidation –Give up non-exempt assets in return for being relieved of debt Most Debtors keep house and car –Debtors keep their future income –To qualify – be below median income In CT, relatively high median: Individual $57k Household of 4 $102k –To qualify – pass Means Test –Least costly - $2,300 to $5,000 (+$306) –Available to small businesses (cheap reorg) 20

21 Chapter 13 Debt Consolidation –Pay creditors over 3 to 5 years out of future disposable income –Above median debtors with regular income –Debt limits: approx. $1/3 million unsecured; $1million secured –Good for catching up on mortgage arrears or paying back taxes Why keep house with negative equity? –Strip off wholly unsecured second mortgage $250k FMV house s/t $275k 1 st & $35K HELOC –Only individuals, not businesses 21

22 Chapter 11 Reorganizations –Available to individuals –Involves creditors, so more time consuming and more expensive than 7 or 13 Use real expenses instead of standard deductions, so smaller payments to creditors –Negotiated with voting creditors –Can modify loans Cram down loan to FMV collateral 22

23 When to File? If you cant make minimum payments on credit card debt If you are making just the minimum payments and dont see how your income will increase to allow you to pay more If you are using retirement funds, which are exempt from creditors in bankruptcy, to pay creditors Business – lose access to working capital 23

24 Pre-Filing Planning/Timing Exemption Planning – keep exempt assets –Avoid using exempt assets to pay creditors –Convert non-exempt into exempt assets Timing –Avoid fraudulent transfers and preferences –6 month look-back period for Means Test –Tax issues –Plan for restructuring business –Waiting too long is usually disadvantageous 24

25 Bankruptcy Process Initial Consultation Determine the most advantageous chapter (7,11 or 13) Negotiate with creditors or not? Whats the exit strategy? Assemble financial information How much will creditors get? For how long? File petition Meeting of creditors Adversary proceedings Confirm a plan (11 and 13) Obtain discharge 25

26 How To Pay For Bankruptcy Stop paying creditors Tax refunds Relatives (debt to relatives is discharged) Retirement funds Sell assets that might not be exempt Payment plans Bankruptcy must be paid before filing 26

27 Balbus Law Firm Able to file in all chapters: 7,11 & 13 –Flexibility to file in the best chapter for the debtor Represents primarily debtors Represents individuals and small businesses Practice devoted to bankruptcy Practice in CT and NY

28 Andrew G. Balbus Academic Credentials –LL.M. Bankruptcy St. Johns Law School –JD Harvard Law School –MBA (finance) Columbia University –AB (accounting/management science) Duke University –Phi Beta Kappa –Beta Gamma Sigma

29 Andrew G. Balbus Unique Background –Prior NYC legal experience in tax & corporate law –Prior investment banking experience financing companies and negotiating debt agreements –Prior turnaround experience restructuring jewelry manufacturing firm on the verge of bankruptcy

30 108 Mill Plain Road, Suite 200 Danbury, CT (203)

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