Some Matters to Consider Before Filing for Bankruptcy

As a result of the inevitable economic hardship brought on by the COVID-19 pandemic, it can be reasonable to question whether filing for bankruptcy protection is the right option for you.

Filing for bankruptcy is considered as “protection” because it includes an automatic stay, meaning it automatically halts most lawsuits, repossessions, foreclosures, utility shut-offs, collections, etc. It can provide individuals and businesses with time to regroup and restructure or liquidate their assets without the imminent pressure of paying their creditors. The bankruptcy process also provides a framework to negotiate with creditors and create a plan for the future.

If you or your business are considering filing for bankruptcy protection, you should consult an experienced bankruptcy attorney. Adequate counsel can guide you through the process of analyzing your options and the various factors you need to consider, including an estimate of the costs you would incur. The bankruptcy process can get expensive!

There are six types of bankruptcy under the U.S. Bankruptcy Code, two of which are most relevant to businesses:

  • Chapter 7: basic liquidation for individuals and businesses. This is the simplest and quickest form of bankruptcy available. Chapter 7 is known as straight bankruptcy.
  • Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; it is known as corporate bankruptcy. Chapter 11 is a form of financial reorganization, which typically allows companies or individuals to continue to function while following debt repayment plans.

Individual bankruptcies can be filed under Chapter 7, Chapter 11 (for individuals with substantial assets and debts) or Chapter 13. Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts and is also known as Wage Earner Bankruptcy.

The Small Business Reorganization Act (“SBRA”), signed into law in August of 2019, streamlined the Chapter 11 process for small businesses. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) temporarily expanded the coverage of the SBRA and added protections for individuals receiving aid related to COVID-19.

Although you will need a bankruptcy attorney to provide you with legal advice and counseling along the way, here are some steps you can take to protect your business and yourself.

Analyze whether you are eligible for any of the aid provided by the CARES Act. Weaver has compiled extensive information on resources and topics of interest related to the CARES Act.

Keep the lines of communication with your stakeholders open. Be frank with stakeholders regarding the current situation of the business and maintain realistic expectations for the future. Talk to your creditors. Disappearing or refusing to respond to their calls, emails, etc. will backfire, as you will lose credibility and they may be less likely to work with you to get a restructuring plan confirmed.

Keep your records in order. Organized and transparent financial records are an asset while going through the bankruptcy process.  They lend credibility to your business in front of the judge and with your creditors. Transparent record keeping can also help stave off potential claims of mishandling of funds or fraud. In addition, good financial records will make the reporting process to the bankruptcy court easier and will assist in the financial forecasting process required in the restructuring plan.

Be aware of the risk of potential litigation. Bankruptcy rules regulate what debtors can do with their assets during the bankruptcy process, but certain restrictions look back even before the bankruptcy was filed. Creditors or other parties may file suit as part of the bankruptcy proceedings if they believe the debtor has, intentionally or not, transferred assets that could be used to pay them.

The transfer of a debtor’s assets before and during the bankruptcy process is regulated by law, including in some jurisdictions a form of the Uniform Fraudulent Transfer Act (UFTA). Several states have their own fraudulent transfer statutes; for example, in Texas, it is the Texas Uniform Fraudulent Transfer Act (TUFTA). Those statutes provide the requirements and restrictions on the transfer of assets and set out circumstances where certain transactions can be considered to have been fraudulent in nature. When transactions are challenged by the bankruptcy trustee or creditors, all parties involved may find themselves in need of assistance in tracing those transactions and supporting the intent.

Weaver’s restructuring and turnaround services, as well as our forensic and litigation services professionals have extensive experience helping clients assess their current financial situation and complete the restructuring process. We have also provided expert services to debtors, creditors and trustees involved in the litigation of fraudulent transfer cases, and we have worked with many attorneys experienced in these matters.

For more information, contact us.

Authored by Helga Zauner, CVA, CFE, MAFF

© 2020

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Helga Zauner

Helga Zauner

Managing Director, Forensics and Litigation Services

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Helga A. Zauner, CVA, CFE, MAFF, is a testifying expert witness with 27 years of experience in litigation consulting, financial…

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