Non Judicial Bankruptcy; An Overlooked Alternative
Unfortunately, sometimes businesses find themselves in financial stress and seek the advice of a Bankruptcy Attorney; we recommend a consultation by qualified attorneys in the field.
Bankruptcy is expensive and many attorneys will tell you that you’re too broke to go bankrupt. The bankruptcy process is very expensive and you must have available cash to “pay your way” through court; attorney fees, US Trustee Fees, and expert consultants. We have been involved in numerous cases where the attorney fees exceeded $100,000.
So if you’re that broke, what do you do? Or a better question, Is There an Alternative?
The Answer is YES!!
Here are two options which we will discuss in more detail later:
Non-Judicial Chapter 11: The reorganization is a voluntary action by a company to acknowledge their financial condition to creditors and seek cooperation in settling debts. There is no protection from collection efforts by creditors and the process is informal; with no laws governing the process.
Now let’s review some bankruptcy basics.
Chapter 7: Chapter 7 bankruptcy is primarily a liquidation of a company’ assets. The first step is to consult with a competent and experienced bankruptcy attorney.
Chapter 11: Chapter 11 bankruptcy laws provide certain protections from creditors as a company attempts to reorganize its financial affairs and develop a plan of reorganization that will satisfy its creditors. Fundamentally, companies seeking Chapter 11 protection must have the ability to recover from their financial duress and demonstrate an ability to pay creditors over a period of time.
FILING FOR BANKRUPTCY
Any decision with regard to liquidation or reorganization should be based upon advice from legal counsel. The laws involving debt, shareholder liability, and payment of creditors are complex.
Filing for bankruptcy, chapter 7 or 11, is a highly regulated process. All actions of the company, it’s shareholders, and officers will be subject to examination by the US Trustee’s Office going back as far as two years prior to filing. Your records will need to be complete and accurate; you will be swearing under oath and threat of criminal prosecution as to the accuracy of any statement you make in the filings.
In Chapter 7 cases, a trustee will be appointed to liquidate your company; without regard to your interests. The Trustee’s primary obligation is to liquidate and pay your creditors as much money as can be realized through liquidation. In addition to your legal fees, the Trustee will also be paid out of your bankruptcy estate; as will any consultants that the Trustee hires to assist him. Upon final liquidation, if your creditors have not been fully satisfied and you have guaranteed the debt personally, you may remain liable for the unpaid balances.
In a Chapter 11 filing, you may be appointed as “Debtor in Possession” of your company; but creditors have the right to oppose such actions and seek other alternatives, including a conversion of your case to Chapter 7 – Liquidation. Additionally, a creditor committee may be appointed to review all business activities; both pre- and post-petition date.
During the pendency of a Chapter 11 proceeding, your company will be required to prepare detailed Monthly Operating Reports that account for all financial transactions. These reports are reviewed by all of your creditors and the Office of the United States Trustee. You will be required to attest under oath and penalty as to the accuracy of the information being submitted to the court. These reports become public record and are available to anyone interested in your company.
The primary objective of a Chapter 11 proceeding is the Confirmation of a Plan of Reorganization. The process generally takes 6-12 months and is subject to objections and adversary actions from your creditors. In the interim, the Court will most likely review and approve an interim budget submitted by your company; once approved, those are the only expenditures allowed. No assets can be sold or mortgaged without Court approval. In general, only activities that are in the “normal course of business” will be authorized; including leases, financing agreements, and similar items.
The costs of bankruptcy can be alarming. In chapter 7 cases, funds are insufficient to pay creditors which means that you will have to pay your attorney with other funds. Depending upon the circumstances, attempts by creditors to enforce personal guarantees, and adversary actions that may be filed, legal fees could range from $5,000-$25,000 or more.
In Chapter 11 proceedings, the legal requirements are stringent; which means more time spent by your attorney in handling your case. There will be creditor meetings, cash collateral motions, insider pay motions, authorized budget motions, and more. Each of these activities require filings into the court record, memorandums of support, and appearance in court to support the motions that have been filed.
You will be required to fill out forms, submit financial information, list all your creditors, meet with your creditors, and numerous other activities. In every instance, your attorney must be involved and review every item that you submit in the course of the bankruptcy. Often times, the information required is not readily available and your accountant will be involved in preparing the reports. And if your reports are inadequate or incomplete, your attorney will be challenged by the US Trustee to fully comply with the courts requirements; which could result in a motion and court appearance.
And creditors have the right to challenge your Chapter 11 filings to the record. If creditors file objections or other motions, your attorney will have to review, answer, and defend you; all of which involves more time and expense.
Your attorney will prepare two important documents: (1) A Disclosure Statement; and (2) Your Plan of Reorganization. These are not business plans, they arelegal documents which must satisfy the specific requirements of the bankruptcy code. These documents are lengthy, detailed, and take an enormous amount of time to produce. Once filed, creditors will comment, a hearing will be conducted, and usually the court will order revisions; which means another round of filings and another court appearance.
Your attorney will not be able to provide you with a “Fixed Cost” of his representation; there are too many variables. Most experienced bankruptcy attorneys will require a retainer prior to filing and will bill monthly for services. Your attorney and his fees must be approved by the court, will be reviewed by the US Trustee’s Office, and will become public record. In a Chapter 11 case, attorney fees can range from $10,000 to $100,000, or more. Even small business cases typically cost $60,000 to prosecute; which must be paid within 30 days of the courts confirmation of your Plan of Reorganization.
THE NON-JUDICIAL BANKRUPTCY OPTION
The Non-Judicial Bankruptcy Option is simply a self-directed effort to settle with creditors and either liquidate the assets or your company on more favorable terms or reach payments terms with creditors so that you can continue your business activities; assuming your business is profitable. This process is not governed by rules & regulations, by a strict code, and is not supervised by anyone other than you and your attorney. Retaining a competent bankruptcy attorney to supervise the negotiation with creditors is STRONGLY ADVISED. If your company later files for bankruptcy, all actions you have taken will most likely be reviewed and may be overturned and reversed by the court. Advice of competent counsel is essential to success.
And we can help you through that process.
THE NON-JUDICIAL PROCESS
The process is simple:
- First, we’ll prepare all the schedules and paper work as if you were filing for bankruptcy.
- We’ll examine your Balance Sheet and Income Statement
- We’ll sit down with you and your attorney to discuss a course of action
- We’ll write a business plan of reorganization
- We’ll communicate with creditors
- We’ll prepare monthly reports and review them with you
- We’ll memorialize creditor agreements with written documents, reviewed by your attorney
- We’ll reorganize your affairs and implement a non-judicial Plan of Reorganization
The Non-Judicial process will track the bankruptcy process in many ways; without the public filings, US Trustee reviews, and credit oversight. During this period, creditors retain all rights of action against you and can sue you, file for foreclosure, or take any other legal action against you that they are entitled to take.
The Non-Judicial strategy is an attempt to resolve your financial situation without going to court. The process is much less expensive and can be cancelled at any time; without penalty. In many cases, your creditors simply want to be paid, something. Utilizing experienced Workout Specialists to negotiate terms with creditors will usually bring great results. While you may attempt this effort yourself, the relationship between you and your creditors has probably already deteriorated. Inserting a third party neutral facilitator can rebuild the relationship between you and your creditors.
Louisiana law, and many other states, provide for the non-judicial liquidation of a company thru the appointment of a liquidator. In certain situations, and we recommend you seek advice of legal counsel, a non-judicial liquidation is the most effective and least costly option that can be pursued.
In Louisiana, the process is simple.
- First, the shareholders vote to Liquidate.
- Secondly, they appoint a Liquidator to take over the operations and management of their company. Once appointed, the Liquidator assumes all of the authority of the officers and Board of Directors.
- The Liquidator takes total control of the company and makes all decision; irrespective of the shareholders, board of directors, and officers.
- The Liquidator sells the assets, settles with creditors, and files for a final liquidation with the Louisiana Secretary of State.
The process can be interrupted by someone filing a suit and forcing the liquidation to be overseen by a court. In that event, costs will be higher, but often less than a Chapter 7 bankruptcy filing.
Businesses will often utilize this legal remedy when the assets and liabilities are approximately even; or very little equity exists in the business. In bankruptcy, assets are often sold for pennies on the dollar to bargain hunters. A competent Liquidator may not get top dollar, but will most likely maximize the value of the assets and the cost of selling the asset is often minimal.
The Louisiana Legislature saw the value of having a viable process of liquidation without the burden of time and expense found in bankruptcy cases. The Non-Judicial Liquidation laws are often overlooked, but in the right circumstance can result in very favorable results. It’s an alternative for that company that is “too broke to file for bankruptcy”.
Consider all your options, talk to your attorney, and remember there are alternatives.