Bankruptcy and Business Reorganization Basics for Small Business

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1 Bankruptcy and Business Reorganization Basics for Small Business The Legal Aid Society Community Development Project The information in this document is provided for informational purposes only and does not constitute legal advice. Please consult a qualified attorney prior to acting upon the information contained in this document.

for informational purposes only and does not constitute legal advice.

2 Options for Distressed Businesses Bankruptcy is one of several options available Out of court alternatives include: Out of court workouts with creditors Assignments for the benefit of creditors Receiverships Obtain additional credit Best option depends on specific facts involved Consult an attorney to discuss your options

Assignments for the benefit of creditors Receiverships Obtain additional credit

3 Out of Court Alternatives Pros and Cons Pros Less risk of business disruption Less costly Less risk of loss of control over process/less disclosure Cons Creditors must be willing to negotiate Requires consent of all creditors and holdouts are possible May not cover all the obligations of the debtor Financing arrangements can be complex and difficult to obtain

to negotiate Requires consent of all creditors and holdouts are possible May not cover all

4 The Goal of Bankruptcy Law Purpose of federal bankruptcy laws is to give debtors a financial "fresh start" from burdensome debt This is accomplished through the bankruptcy discharge, which releases debtors from liability from specific debts and bars creditors from taking action against the debtor to collect such debts

through the bankruptcy discharge, which releases debtors from liability from

5 Types of Bankruptcy Cases There are different types of bankruptcy cases, including: Chapter 7 - Liquidation Chapter 9 - Municipality Chapter 11 Reorganization Chapter 12 Family Farmers and Family Fishermen Chapter 13 - Adjustment of Debts of an Individual with Regular Income Chapter 15 - Ancillary and Other Cross-Border Cases

Reorganization Chapter 12 Family Farmers and Family Fishermen Chapter 13 -

6 Chapter 7 Debtor ceases operations and goes out of business A trustee takes over the debtor s assets, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors If your company has assets, when the bankruptcy case ends depends on how long it takes the trustee to gather the assets, sell them, and distribute the proceeds to your creditors

property and the rights of secured creditors If your company has assets, when the bankruptcy case ends

7 Chapter 13 Designed for an individual debtor who has a regular source of income and meets eligibility requirements Individuals conducting business in their personal names as a "dba" may reorganize assets and liabilities (and assets and liabilities of such business) Chapter 13 allows the debtor to propose a "plan" to repay creditors over time usually three to five years Debtor must complete payments required under the plan before receiving the discharge

liabilities (and assets and liabilities of such business) Chapter 13 allows the debtor to propose a "plan" to

8 Chapter 11 Generally used by commercial enterprises that desire to continue operating a business and repay creditors through a plan of reorganization The court ultimately approves (confirms) or disapproves the plan of reorganization Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others

approves (confirms) or disapproves the plan of reorganization Under the confirmed plan,

9 Chapter 11 (cont d) The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations to return to profitability Generally the debtor emerges from bankruptcy with a reduced debt load and a reorganized business

operations to return to profitability Generally the debtor

10 Special Rules for Small Business Debtors Definition of small business debtor: Must be engaged in commercial or business activities with aggregate debts that do not exceed $2,190,000; and No creditors' committee appointed or court decides a creditors committee is not necessary Certain reporting requirements Different filing deadlines Additional oversight by U.S. Trustee

$2,190,000; and No creditors' committee appointed or court decides a creditors committee is

11 Impact of Bankruptcy on Leases A clause in a lease providing for termination upon bankruptcy filing is unenforceable A debtor tenant can continue to occupy premises but must satisfy all obligations under lease If debtor does not pay rent, the landlord may ask the court to compel the debtor to pay rent or to allow landlord to evict the debtor tenant

must satisfy all obligations under lease If debtor does not pay rent, the landlord may

12 Impact of Bankruptcy on Leases (cont d) The Bankruptcy Code provides debtors, under specified terms and circumstances, the following choices with respect to leases: Assumption Assumption and Assignment Rejection If debtor takes no action within a specified time period, a lease is considered rejected

with respect to leases: Assumption Assumption and Assignment Rejection If

CCIM Presentation: How Bankruptcies Affect Distressed Assets By: Tom Hillier and Ivy Grey Davis Wright Tremaine LLP

CCIM Presentation: How Bankruptcies Affect Distressed Assets By: Tom Hillier and Ivy Grey Davis Wright Tremaine LLP BANKRUPTCY 101 BASICS & CONTEXT 1. Guiding Policies a. Equality of Distribution b. Adequate